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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