Question

In: Economics

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 of money is-----

If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 20 percent, the quantity of money is------

Expert Solution

If people hold all money as currency, the quantity of money is $3,000.

If people hold all money as demand deposits at banks with 100% reserves, the quantity of money is $3,000.

If people have $1,500 in currency and $1,500 in demand deposits with 100% reserves, the quantity of money is $3,000.

If banks have a reserve ratio of 20%, the money multiplier is 1 / 0.20 = 5. So if people hold all money as demand deposits, the quantity of money is 5 x $3000 = $15,000.

If people hold equal amounts of currency (C) and current deposits (D) and the banks maintain a reserve ratio of 20 percent, then two conditions must be satisfied:

(1) C=D, so that people have equal amounts of currency and current deposits;

(2) 20 x ($3000 –C) =D, so that the money multiplier (20) times the number of dollar notes that aren’t being held by people ($3000 –C) equals the amount of current deposits (D).

Therefore, 20 x ($3000 –D) =D,

$60,000 – 20D=D,

$60,000 = 21D,

D= $2857.14.

Therefore, C= $2857.14.

The quantity of money is C+D=$5714.28.

Since currency is held in $1 bills, C = $2857 , D = 20 x (3000 -2857) = $2860.

Therefore the quantity of money is $5717.

Rahul Sunny answered 2 years ago

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