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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25 September, 11:27

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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Answers (1)

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Angelo Duran · Answer 1

(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