ps8ans - ECON 205: PRINCIPLES OF MACROECONOMICS FALL 2007...

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ECON 205: PRINCIPLES OF MACROECONOMICS FALL 2007 MARK MOORE PROBLEM SET 8: SOLUTIONS Except for probem 5, all the calculations about the money supply assume that banks hold no excess reserves and that any additional money created by banks is held entirely as deposits and not as cash. 1. Assume that the buried treasure is cash. Then, the effect on the money supply is $120 million - $12 million = $108 million. We have to subtract the initial $12 million because the value of the treasure does not constitute an addition to the money supply. Note that the $120 million (=$12 million/0.1) is the total increase in deposits. 2. If the reserve ratio were 25%, the total change in deposits would be $12 million/.25=$48 million, so the total change in the money supply would be $48 million -$12 million = $36 million. If the reserve ratio were 100%, the total change in deposits would be $12 million, and the total change in the money supply would be zero. 3. a and c. These transactions have no effect on the overall money supply. To make this clear, suppose you withdraw $100 from Bank A , and the concert promoter deposits your $100 in its account at Bank A. In this case, Bank A has no change in its deposits, so nothing changes. If the concert promoter deposits the $100 in a different bank, say Bank
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ps8ans - ECON 205: PRINCIPLES OF MACROECONOMICS FALL 2007...

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