PROMPT: For all questions assume the following starting point: The money supply (M) is composed of currency (C) held by the non-bank private sector (NBPS) and demand deposits (DD) held at banks. Banks are required to hold cash reserves (CR) equal to 10% of their demand deposit liabilities. The remainder of the banks DD liabilities are backed by loans (L). Initially banks have 2000 in cash reserves and the NBPS holds 500 in currency. Currently, banks do not hold excess reserves. OTHER INFORMATION: (A.) What are the initial values for DD, L and M? QUESTION TO BE SOLVED: What would happen to the values in part (A.) if banks decided to hold 2.5% excess reserves?
PROMPT: For all questions assume the following starting point: The money supply (M) is composed of currency (C) held by the non-bank private sector (NBPS) and demand deposits (DD) held at banks. Banks are required to hold cash reserves (CR) equal to 10% of their demand deposit liabilities. The remainder of the banks DD liabilities are backed by loans (L). Initially banks have 2000 in cash reserves and the NBPS holds 500 in currency. Currently, banks do not hold excess reserves. OTHER INFORMATION: (A.) What are the initial values for DD, L and M? QUESTION TO BE SOLVED: What would happen to the values in part (A.) if banks decided to hold 2.5% excess reserves?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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PROMPT:
For all questions assume the following starting point:
The money supply (M) is composed of currency (C) held by the non-bank private sector (NBPS) and
OTHER INFORMATION:
(A.) What are the initial values for DD, L and M?
QUESTION TO BE SOLVED:
What would happen to the values in part (A.) if banks decided to hold 2.5% excess reserves?
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