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unit 8 assignment macroeconomics

# unit 8 assignment macroeconomics - Macroeconomics 1 Brenda...

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Macroeconomics 1 Brenda Russell BU204-02 Macroeconomics May 12, 2011

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Macroeconomics 2 Macroeconomics Question: In Westlandia, the public holds 50% of M1 in the form of currency, and the required reserve ratio is 20%. 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 \$25.60 \$12.80 \$12.80 5 \$12.80 \$2.56 \$10.24 \$10.24 \$5.12 \$5.12 6 \$ 5.12 \$1.02 \$4.10 \$4.10 \$2.05 \$2.05 7 \$2.05 \$0.41 \$1.64 \$4.10 \$0.82 \$0.82 8 \$0.82 \$0.16 \$0.66 \$0.66 \$0.33 \$0.33 9 \$0.33 \$0.07 \$0.26 \$0.26 \$0.13 \$0.13 10 \$0.13 \$0.03 \$0.10 \$0.10 \$0.05 \$0.05 totals \$833.25 \$166.65 \$666.60 \$666.60 \$333.30 \$333.33 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.)
Macroeconomics 3

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