BU204_10 _Finley_Joey_ Unit 8

# BU204_10 _Finley_Joey_ Unit 8 - Running head MONEY BANKING...

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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 BANKING...

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