HW11_Solutions

# HW11_Solutions - Homework 11 Solutions ECON 010 Fall 2011...

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Question 2: Money and Money Multiplier Use the information in the table below to answer the following questions. Last Bank of Cedar Bend Assets Liabilities Reserves: \$45,000 Deposits: \$150,000 Loans: \$105,000 a. If the reserve requirement is 25%, calculate the amount of excess reserves that this bank holds. Answer: If the reserve requirements is 15%, then the bank is required to hold only \$150,000 x 0.25 = \$37,500. Therefore, this bank is holding \$45,000-\$37,500=\$7,500 in excess reserves. b. If this bank decides to decrease its reserves to the required amount, calculate the increase in the money supply which will result from this change? Answer: An additional loan of \$7,500 can generate \$7,500 x 1/0.25 = \$30,000 in additional money supply. Question 3: Money The economy of Elmendyn contains 2,000 \$1 bills. a. If people hold all money as currency, what is the money supply in Elmendyn? Answer: If people hold all money as currency, the money supply is 2000 x \$1 = \$2,000. b. If people hold all money as demand deposits and banks maintain 100% reserves, what is the money supply in Elmendyn? Answer If people hold all money as demand deposits at banks with 100% reserves, the money supply is \$2,000.

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