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10SQ8(answer) - (c The maximum amount of new money that the...

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Econ. 1A: Quiz 8 . Name.____________________. ID: ________________. a. Quiz 8 is closely related to one page handout” How banks create money” which I presented in Wednesday, March 21, 2010) b. You should read our text: chapter 8, or my lecture note, or study plan in myeconlab. 1. Suppose rrr = 0.1 and banks have no excess reserves (ER). Mary deposits $200 dollars in his account. ER = R – Rq, i.e., ER = Reserve – Required Reserves. Calculate [Show your calculation explicitly]. (a) The bank’s Rq and ER as soon as Jamine makes the deposit. [2] R q = D x rrr = 200 x 0.1 = 20. ER = R – R q = 200 – 20 = 180. (b) The money multiplier and the maximum amount of loans that the bank can make. [2] Money multiplier = (1/rrr) = (1/0.1) = 10 Max loan = ER x (1/rrr) = 180 x 10 = 1,800.
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Unformatted text preview: (c) The maximum amount of new money that the bank can create. Also show reserves (R), deposits (D) and Loans by using T account . [4] .A L . R 200 D 200 Loan 1,800 ∆D 1,800 2,000 2,000 New money = ∆D = 1,800 2. Suppose in an economy T account of the banks is showing as in T. On the other hand, households and firms hold $20 in currency and $5 in coins. Calculate (a) the monetary base and (b) the quantity of money in this economy. Show your calculation explicitly. [4] All banks .A L . R $60 D $300 (a) Monetary base = Federal reserve notes + coins + bank’s reserves = 20 + 5 + 60 = 85. (b) Quantity of money = currency held outside banks + deposits = 20 + 5 + 300 = 325. 1...
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