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6 October, 19:25

The economy of Elmendyn contains 2,000 $1 bills. a. If people hold all money as currency, the quantity of money is $. b. If people hold all money as demand deposits and banks maintain 100 percent reserves, the quantity of money is $. c. If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, the quantity of money is $. d. If people hold all money as demand deposits and banks maintain a reserve ratio of 25 percent, the quantity of money is $. e. If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 25 percent, the quantity of money is $.

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  1. 6 October, 23:02
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    (a) $2,000

    (b) $2,000

    (c) $2,000

    (d) $8,000

    (e) $3,200

    Explanation:

    Given that,

    Number of bills = 2,000

    Worth of each bill = $1

    (a) If people hold all money as currency, then the quantity of money is determined as follows:

    = Number of bills * Worth of each bill

    = 2,000 * $1

    = $2,000

    (b) If people hold all money as demand deposits and banks maintain 100 percent reserves,

    Money multiplier = 1 / Reserve requirement ratio

    = 1/1

    = 1

    Quantity of money:

    = Money multiplier * Demand deposits

    = 1 * $2,000

    = $2,000

    (c) If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves,

    Therefore,

    Currency = $1,000

    Demand deposits = $1,000

    Quantity of Money:

    = Currency with public + Demand deposits

    = $1,000 + $1,00

    = $2,000

    (d) If people hold all money as demand deposits and banks maintain 25 percent reserves,

    Money multiplier = 1 / Reserve requirement ratio

    = 1/0.25

    = 4

    Quantity of money:

    = Money multiplier * Demand deposits

    = 4 * $2,000

    = $8,000

    (e) If people hold equal amounts of currency and demand deposits and banks maintain 25 percent reserves,

    Now, we know that

    Currency = Demand deposits ... (1)

    Banks maintain 25 percent reserves,

    4 * ($2,000 - Currency) = Demand deposits

    4 * ($2,000 - Demand deposits) = Demand deposits

    $8,000 = 5 Demand deposits

    $1,600 = Demand deposits

    Therefore, the currency = $1,600

    Quantity of money:

    = Currency + Demand deposits

    = $1,600 + $1,600

    = $3,200
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