In the country of Azeroth, people hold as much currency as they have on their bank....

In the country of Azeroth, people hold as much currency as they have on their bank. If banks lend out all of the deposits, what is the money multiplier? Note: Make sure to write your answer out as a number.

Expert Solution

Bank creates money through lending process. Assume an initial deposit of $10,000 is made and required reserve ratio is 10%.

Money Multiplier = (1 / Required Reserve ratio) = (1 / 0.1) = 10. Bank can raise money supply by maximum of 10 * 10,000 = 100,000

It means that bank keep 10% of 10,000 with them and lend rest of the money which is $9,000 in its first round. They assume that this $9,000 will come back to them when people spend money in the market. If people hold currency and deposit half in the bank which will result in fall in deposit money received by banks. In earlier situation bank will get back $9,000 and they will lend $8,100 by keeping 10% with them in second round of lending while if people hold cash, bank will not get $9,000 in return and bank would not be in a situation to lend more money. It will result in fall in money multiplier in the economy and eventually the maximum amount of money supply.

Rahul Sunny answered 2 years ago

Suppose that we define money as the sum of currency and demand deposits. If people hold...

Suppose that we define money as the sum of currency and demand deposits. If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10 percent, what is the size of money multiplier? a. 1.8 b. 10 c. 2.5 d. 5 the answer is (a) but i don't know why

Which of the following raise the money multiplier? People want to hold less currency relative to...

Which of the following raise the money multiplier? People want to hold less currency relative to deposits, or banks want to hold more excess reserves relative to deposits. People want to hold less currency relative to deposits, or banks want to hold fewer excess reserves relative to deposits. People want to hold more currency relative to deposits, or banks want to hold more excess reserves relative to deposits. People want to hold more currency relative to deposits, or banks want...

The economy of Elmendyn contains 3,000 $1 bills. If people hold all money as currency, the...

The economy of Elmendyn contains 3,000 $1 bills. If people hold all money as currency, the quantity of money is --- If people hold all money as demand deposits and banks maintain 100 percent reserves, the quantity of money is----- If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, the quantity of money is--- If people hold all money as demand deposits and banks maintain a reserve ratio of 20 percent, the quantity...

The economy of Elmendyn contains 900 $1 bills. A. If people hold all money as currency,...

The economy of Elmendyn contains 900 $1 bills. A. If people hold all money as currency, the quantity of money is. B. If people hold all money as demand deposits and banks maintain 100 percent reserves, the quantity of money is. C. If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, the quantity of money is. D. If people hold all money as demand deposits and banks maintain a reserve ratio of 12.5...

Is it more beneficial for a country to have a strong national currency or to have...

Is it more beneficial for a country to have a strong national currency or to have a weak national currency?

Assume that the non-bank public holds no physical currency (and banks hold no excess reserves). After...

Assume that the non-bank public holds no physical currency (and banks hold no excess reserves). After the banking system has fully adjusted to the initial deposit what will be the total impact of the open market purchase on the money supply? Explain your answer (including any relevant calculations

" it is always good for a country to have a high currency value !" do...

" it is always good for a country to have a high currency value !" do you agree with this starement ? discuss with relevant examples .

Consider an economy with a constant population in which people wish to hold bank checking deposits...

Consider an economy with a constant population in which people wish to hold bank checking deposits worth a total of 7,000 goods in every period. The economy has a total endowment of 15,000 goods in each period. There is a total stock of unintermediated capital of 2,000 goods in each period. Bank deposits are the only form of money in the economy. Deposits at banks are subject to a reserve requirement of 15%. The net real rate of return to...

Suppose that country A pegs its currency to country B’s currency, and A has excessively high...

Suppose that country A pegs its currency to country B’s currency, and A has excessively high inflation. Country B is only likely to help A if: a. both are members of the International Monetary Fund. b. country B has a free trade agreement with country A. c. country B’s output is above its preferred level. d. country B does not trade at all with country A. e. country B’s output is below its preferred level.

Assume that banks do not hold excess reserves and that households do not hold currency, so...

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. To simplify the analysis, suppose the banking system has total reserves of $300. Determine the money multiplier and the money supply for each reserve requirement listed in the following table. Reserve Requirement Simple Money Multiplier Money Supply (Percent) (Dollars) 20 ______ _____ 10 ______ ______ A higher reserve requirement is associated with a (smaller or larger)...

Question