11. The economy of Elmendyn contains 2,000 $1 bills.

a. If people hold all money as currency, what is the quantity of money?

b. If people hold all money as demand deposits and banks maintain 100 percent reserves, what is the quantity of money?

c. If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, what is the quantity of money?

d. If people hold all money as demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money?

e. If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money?

Question

Arts

Agustin Holloway

16 September, 15:39

11. The economy of Elmendyn contains 2,000 $1 bills.

a. If people hold all money as currency, what is the quantity of money?

b. If people hold all money as demand deposits and banks maintain 100 percent reserves, what is the quantity of money?

c. If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, what is the quantity of money?

d. If people hold all money as demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money?

e. If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money?

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Answers (1)

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Lilianna · Answer 1

Knowing that the economy of Elmendyn contains 2,000 $1 bills:

A. If people held all money as currency, the money is circulated in the economy. The quantity of money would be $ 2000.

B. If people hold all money as demand deposits, and banks maintain 100 percent reserves, the quantity of money will still be $ 2000. Demand deposit is an account that lets you withdraw without further notice. A bank reserve is the currency that the bank does not lend to the public. In this situation, the money circulating in the economy is $ 2000.

C. If people hold equal amounts of currency and demand deposits, and banks maintain 100 percent reserves, the quantity of money is $ 2000. In this situation, the currency is $1000 and the demand deposit is another $1000. With this the total amount of money circulating in the economy is $ 2000.

D. If people hold all money as demand deposits and banks maintain a reserve ratio of 10 percent, the answer is $20 000. The calculation can be done through this:

10 x (2,000 - C) = D

When all money is held as a deposit, there is no currency (C=0)

So 10 x (2,000 - 0) = D

D = $20,000

E. If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10 percent, the quantity of money is $3,636. In this situation, it is given that the amount of currency is equal to the amount of demand deposit.

So the calculation is this:

10 x (2,000-C) = D

10 x (2,000-D) = D

$20,000 - 10D = D

$20,000 = 11D

1,818=D

Since C=D, C is also 1,818

C+D = $3,636