1. Suppose that initially the money supply (M1) of the economy is made up of $1,000. a. If people hold all of their money and do not deposit any of it into the bank, what is the size of the money supply? b. Suppose that people deposit the entire $1,000 into their checking account. Assume that the banks have a 100% required reserve ratio. Now what is the size of the money supply? c. Suppose the entire $1,000 is deposited into checking accounts. Now banks have a required reserve ratio of 5%. How large could the money supply become? Show this using the Money Supply and Money Demand model. d. What is the effect on the money supply if the required reserve ratio is changed from 5% to 10% ? Show this using the Money Supply and Money Demand model.

1. Suppose that initially the money supply (M1) of the economy is made up of $1,000. a. If people hold all of their money and do not deposit any of it into the bank, what is the size of the money supply? b. Suppose that people deposit the entire $1,000 into their checking account. Assume that the banks have a 100% required reserve ratio. Now what is the size of the money supply? c. Suppose the entire $1,000 is deposited into checking accounts. Now banks have a required reserve ratio of 5%. How large could the money supply become? Show this using the Money Supply and Money Demand model. d. What is the effect on the money supply if the required reserve ratio is changed from 5% to 10% ? Show this using the Money Supply and Money Demand model.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter27: Money And Banking

Section: Chapter Questions

Problem 31P: Humongous Bank is the only bank in the economy. The people in this economy have 20 million in money,...

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