Subpart (a):
The money supply of the economy.
Subpart (a):
Explanation of Solution
The Federal Reserve is the central bank of the US economy, and it is usually known as the Fed. The Fed has the responsibility to keep the economy controlled from the fluctuations, and it has to control the money supply of the economy through its
It is given that the economy contains 2,000 bills that have a value of $1 each. So, the
Concept introduction:
Money: It is any item that is accepted as the payment for the goods and services by the economy.
Banks: They are the financial institutions that accept the deposits of money from the general public and use this money to provide loans to the public.
Fed: It is the central bank of the US, and it has the responsibility of controlling the economy.
Subpart (b):
The money supply of the economy.
Subpart (b):
Explanation of Solution
The banks hold all the deposits as the excess reserves and people deposit all the currency with the banks, then the total deposits with the bank becomes $2,000, and since no loan is provided by the banks, the total reserves of the economy remain the same, which means that the total quantity of money in the economy remains as $2,000 itself. No new money is created.
Concept introduction:
Money: It is any item that is accepted as the payment for the goods and services by the economy.
Banks: They are the financial institutions that accept the deposits of money from the general public and use this money to provide loans to the public.
Fed: It is the central bank of the US, and it has the responsibility of controlling the economy.
Subpart (c):
The money supply of the economy.
Subpart (c):
Explanation of Solution
In the case when people hold $1,000 with them and deposits the remaining $1,000 with the banks where the banks maintain 100 percent reserves and nothing is provided as loans to the public, there will be no new currency generated and thus the total quantity of money in the economy will be the summation of the currency held by the public and the currency held by the banks. Thus, it remains the same $2,000.
Concept introduction:
Money: It is any item that is accepted as the payment for the goods and services by the economy.
Banks: They are the financial institutions that accept the deposits of money from the general public and use this money to provide loans to the public.
Fed: It is the central bank of the US, and it has the responsibility of controlling the economy.
Subpart (d):
The money supply of the economy.
Subpart (d):
Explanation of Solution
In the case when the banks have only 10 percent reserves and use the remaining to provide loans to the public, there will be a multiplier effect on the money supply and the multiplier value can be calculated as follows:
So, the value of the money multiplier in the economy is 10. Thus, when the people hold all the money as demand deposits with the banks, the banks use the money to create new money. Thus, the total money supply increases by the multiplier times, which can be calculated as follows:
Thus, the total money supply in the economy will be $20,000.
Concept introduction:
Money: It is any item that is accepted as the payment for the goods and services by the economy.
Banks: They are the financial institutions that accept the deposits of money from the general public and use this money to provide loans to the public.
Fed: It is the central bank of the US, and it has the responsibility of controlling the economy.
Subpart (e):
The money supply of the economy.
Subpart (e):
Explanation of Solution
In the case when the people hold equal amount of currency with them and with the bank
as demand deposits, since the reserve requirement ratio is 10 percent, in order to calculate the quantity of money, the following two equations must be satisfied:
and
We can substitute the first equation in the second equation as follows:
Thus, the deposits held with the banks are $1818.18. Since the public hold equal money with them and with the banks, the people will hold the same quantity with them which is $1818.18. Thus, the total quantity of money can be calculated by summating the two as follows:
Thus, the total quantity of money in the economy is equal to $3636.36.
Concept introduction:
Money: It is any item that is accepted as the payment for the goods and services by the economy.
Banks: They are the financial institutions that accept the deposits of money from the general public and use this money to provide loans to the public.
Fed: It is the central bank of the US, and it has the responsibility of controlling the economy.
Want to see more full solutions like this?
Chapter 16 Solutions
Principles of Macroeconomics (MindTap Course List)
- BUSN5 CH2 WKSMultiple ChoiceIdentify the choice that best completes the statement or answers the question.1. Define economics.a) a financial and social systemb) the study of a countryâs overall economic issuesc) the integration between consumers, families, and businessesd) the study of the choices that different entities make in allocating resources2. Macroeconomics focuses ona) the major issues facing the national economy, but has little or no relevance to individuals.b) smaller economic units such as individual consumers, families, and individual businesses operating within the economy.c) the major issues facing the national economy that may seem abstract, but directly affect an individualâs day-to-day life. d) the role of government, while microeconomics focuses on the private sector.3. After the collapse of the dot com bubble and the 9/11 terrorist attacks, the stock market depreciated and unemployment increased leading many to fear that the…arrow_forwardThe task I am struggling with: Tracy Williams deposits $500 that was in her sock drawer into a checking account at the local bank. The reserve ratio is 10%. a) how dies the deposit initially change the T-account of the local bank? How does it change the money supply? b) If the bank maintains a reserve ratio of 10%, how will it respond to the new deposit? c) if every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan, by how much could the total money supply in the economy expand in response to Tracy´s initial cash deposit of $500? Thank you very much for your help.arrow_forwardWhat steps can the Federal Reserve take to increase the money supply? a) The Federal Reserve can reduce personal income tax rates to encourage households to spend more money b) The Federal Reserve can require all banks to close by 4:00 pm on weekdays and remain closed on weekends. c) The Federal Reserve can increase reserves requirements for banks d) The Federal Reserve and raise the discount e) The Federal Reserve can buy US Treasury securities e) The Federal Reservearrow_forward
- Suppose you inherited $257,000 cash from a bequest, and you decide to deposit it at your bank. Assuming the $257,000 is the only money supply in the economy, your task is to determine how much money your bank can create using the $257,000 you deposited. Show all your calculations The required reserve ratio is 3.5%. a. How much of the initial money supply can the bank give out as loans? If the recipient of the loan keeps the money at the same bank, what will be the total money supply in the economy? b. How much of the new money supply can the bank give out as loans? Will it increase or decrease the total money in the economy? By how much? c. Suppose the required reserve ratio increases by 4.5%, repeat steps in parts (a) and (b). What is the total money supply in the economy? Thank you so much!!arrow_forwardThe central bank of the fictitious country "Alpha" raises bank reserves by $200. What effect will the increase in bank reserves have on the money supply in each of the following situations: a. If the banking system is a 100% reserve banking system, the money supply will increase by $ b. The banking system is a fractional reserve banking system with a desired reserve deposit ratio of 0.25, the money supply will increase by $1arrow_forwardThe people in an economy have $10 million in money. There is only one bank that all the people deposit their money in and it holds 20% of the deposits as reserves. What is the money multiplier in this economy?arrow_forward
- The economy of Elmendyn contains 2000 $1 bills. a) If people hold all money as currency, what is the quantity of money supply ? b) If people hold all money as demand deposit and banks maintains 100% reserves what is quantity of money? c) if people equal amount of currency and demand deposits and bank maintains 100% reserves, what is quantity of money? d) If people hold all money as demand deposits and bank maintaines reserve ratio of 10% what is the quantity of money? e) If the people holds equal amount of currency and demand deposit and banks maintains reserve ratio of 10%, what is the quantity of money?arrow_forwardThe economy of Moneyland contains 5000 $1 bills.a. If people hold equal amounts of currency and demand deposits and banks maintain%100 reserves , what is the quantity of money? b. If people hold all money as demand deposits and banks maintain %20 reserves , whatis the quantity of money?arrow_forward7. a) only the central bank can create money b) commercial banks can create credit c) all UK currency is backed by central bank holdings of gold 8. An increase in the money supply can lead to a) a rise in interest rates b) a fall in the liquidity ratio c) a fall in interest rates 9. The neutrality of money refers to the idea that a) a change in money supply has no impact on output over any time period b) a change in money supply has no short run impact on output c) the real quantity of money is constant in the long termarrow_forward
- While cleaning your apartment, you look under the sofa cushion and find a $300 bill (and a half-eaten taco). You deposit the bill in your checking account. SAMA’s reserve requirement is 20% of deposits. A. What is the maximum amount that the money supply could increase? B. What is the minimum amount that the money supply could increase?arrow_forwardYou just deposited $4,000 in cash into a checking account at the local bank. Assume that banks lend out all excess reserves and there are no leaks in the banking system. That is, all money lent by banks gets deposited in the banking system. Round your answers to the nearest dollar. If the reserve requirement is 20%, how much will your deposit increase the total value of checkable bank deposits? If the reserve requirement is 8%, how much will your deposit increase the total value of checkable deposits? Increasing the reserve requirement decreases the money supply. %24 %24arrow_forwardSuppose you win on a scratch-off lottery ticket and you decide to put all of your $2,500 winnings in the bank. The reserve requirement is 10%. What is the maximum possible increase in the money supply as a result of your bank deposit? maximum increase: $ Which events could cause the increase in the money supply to be less than its potential? All money loaned out is deposited back into the banking system. Banks choose to loan out all excess reserves. SEL Some loan recipients choose to hold some cash instead of depositing all of it in banks. Banks decide to keep some excess reserves on hand. C Z MODE PAYLA I topm PEDRULESTAN SVETE D P Activate Windows Salto Settings to activate Windowsarrow_forward
- Essentials of Economics (MindTap Course List)EconomicsISBN:9781337091992Author:N. Gregory MankiwPublisher:Cengage LearningBrief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher:Cengage Learning