ECON 110 Assignment 6 - A6-4 If the public holds all of...

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A6-4. If the public holds all of their money in the bank and the target (desired) reserve ratio of commercial banks is 10%, then an increase in reserves of $100 leads to an increase in the money supply of $90 in the second round of money multiplier process, and an increase in the money supply of $1000 once the money multiplier process is concluded. A6-5. The increased availability of credit cards over the last 20 years has resulted in an increase in the money supply. False. Credit cards are simply money substitutes (not money themselves), which do not increase money supply in any way, shape or form. They are a way for individuals to complete money transactions before transferring actual money balances. As stated in our definition, money supply is: M1 = currency in circulation + chequing accounts, or M2 = M1 + personal (saving) deposits and term deposits, etc. In this definition, credit cards have no effect on money supply. When a credit card transaction occurs, it is like taking a “loan”, so to pay it off, people still have to transfer true money balances. Credit cards are
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