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9 May, 18:17

Consider the following situations.

a. Bank reserves are $100, the public holds $200 in currency, and the desired reserve-deposit ratio is 0.25. Find deposits and the money supply.

b. The money supply is $500 and currency held by the public equals bank reserves. The desired reserve-deposit ratio is 0.25. Find currency held by the public and bank reserves.

c. The money supply is $1,250, of which $250 is currency held by the public. Bank reserves are $100. Find the desired reserve-deposit ratio.

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  1. 9 May, 21:31
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    A.$600

    B.$100

    C. 0.1

    Explanation:

    Money supply equals to Currency held by the public + Bank reserves: Desired reserve-deposit ratio

    Hence:

    a. Deposits equal bank reserves : by the desired reserve-deposit ratio

    = $100/0.25

    = $400.

    Money supply = currency held by the public + deposits

    = $200 + $400

    = $600.

    b. Let X = currency held by the public = bank reserves.

    Thus money supply equals X + X: by the desired reserve-deposit ratio

    500 = X + 0.25

    500 = 5X

    X=$500/5

    X = $100

    Currency and bank reserves both equal $100.

    c. If the money supply equals $1,250 and the public holds $250 in currency, then the bank deposits must equal $1,000 ($1,250-$250).

    If bank reserves are $100, the desired reserve-deposit ratio

    =100/1,000

    =0.1
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