BU204_10 _Finley_Joey_ Unit 8

BU204_10 _Finley_Joey_ Unit 8 - Running head: MONEY,...

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1 Joey D. Finley Kaplan University Macroeconomics BU204 Fazlul Miah April 26, 2011
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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
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BU204_10 _Finley_Joey_ Unit 8 - Running head: MONEY,...

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