BU204_02 _Barnes_Charity_ Unit8

BU204_02 _Barnes_Charity_ Unit8 - Unit 8[BU204 |...

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Unit 8 [ BU204 | Macroeconomics ] Macroeconomics: Unit 8 BU204-02 By: Charity Barnes May 15, 2011 1
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Unit 8 [ BU204 | Macroeconomics ] Question: In Westlandia, the public holds 50% of M1 in the form of currency, and the required reserve ratio is 20%. 1. Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table. (Hint: The first row shows that the bank must hold $100 in minimum reserves—20% of the $500 deposit—against this deposit, leaving $400 in excess reserves that can be loaned out. However, since the public wants to hold 50% of the loan in currency, only $400 × 0.5 = $200 of the loan will be deposited in round 2 from the loan granted in round 1.) Round Deposits Required reserves Excess reserves Loans Loan proceeds held as currency Loan proceeds deposited 1 $500.00 $100.00 $400.00 $400.00 $200.00 $200.00 2 $200.00 $40.00 $160.00 $160.00 $80.00 $80.00 3 $80.00 $16.00 $64.00 $64.00 $32.00 $32.00 4 $32.00 $6.40 $25.60
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BU204_02 _Barnes_Charity_ Unit8 - Unit 8[BU204 |...

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