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25 February, 05:37

The economy of Baruchville contains 2000 $1 bills. 1. If people hold all money as currency, what is the quantity of money? 2. If people hold all money as demand deposits and banks maintain 100% reserves, what is the quantity of money? 3. If people hold equal amounts of currency and demand deposits and banks maintain 100% reserves, what is the quantity of money? 4. If people hold all money as demand deposits and banks maintain a reserve ratio of 10%, what is the quantity of money? 5. If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10%, what is the quantity of money?

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  1. 25 February, 05:52
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    a) $2000

    b) $2000

    c) $2000

    d) $20000

    e) $11000

    Explanation:

    a) If people hold all money as currency:

    Quantity of money = 2000 * $1 bills = $2000

    b) If people hold all money as demand deposits and banks maintain 100% reserves:

    Quantity of money = 2000 * $1 bills = $2000

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

    Since they are 2000 $1 bills and people hold equal amounts of currency and demand deposits and banks maintain 100% reserves, the 2000 $1 bills would be divided into two parts, one part for demand deposits and the other part for currency.

    Therefore, demand deposits = 1000 * $1 bill = $1000

    Currency = 1000 * $1 bill = $1000

    Quantity of money = Currency + demand deposits = $1000 + $1000 = $2000

    d) If people hold all money as demand deposits and banks maintain a reserve ratio of 10%.

    Reserve ratio (r) = 10% = 0.1

    Since people hold all money as demand deposits:

    Therefore, demand deposits = 2000 * $1 bill * 1/r = $2000 * 1/0.1 = $20000

    Quantity of money = Demand deposits * 1/r = $2000 * 1/0.1 = $20000

    e). If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10%

    Reserve ratio (r) = 10% = 0.1

    Since they are 2000 $1 bills and people hold equal amounts of currency and demand deposits and banks maintain 100% reserves, the 2000 $1 bills would be divided into two parts, one part for demand deposits and the other part for currency.

    Therefore, demand deposits = 1000 * $1 bill * 1/r = $1000 * 1/0.1 = $10000

    Currency = 1000 * $1 bill = $1000

    Quantity of money = Currency + demand deposit = $1000 + $10000 = $11000
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