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# PS 2-3 - ECON S-1452 Summer 2010 Problem Set 2(Due Monday...

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ECON S-1452 Summer, 2010 Problem Set 2 (Due Monday, July 12) 1. Consider two countries: North and South. In South banks hold 100% of their deposits as reserves. In North, the reserve requirement is 50%. Banks do not hold excess reserves in North or in South. No cash is held by the public in South, while in North citizens hold a total of \$500,000 in cash. Each country has \$1 million in reserves. Residents buy goods and services and do their banking only in their own country. a. What is the money supply (M1) in each country? What is the money multiplier in each country? Explain. Suppose that North and South decide to form a single country, the United States of North and South (USNS). In the new country, money supply is the sum of the money supply in North and South; the reserve requirement is 10%. Banks do not hold excess reserves. One year after USNS is formed, citizens of North decide to deposit the \$500,000 of their cash holdings into their banks’ checking accounts. From that moment onward, no cash is ever held by the public in USNS.

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