Round

Deposits

Required reserves

Excess reserves

Loans

Loan proceeds held as currency

Loan proceeds deposited

1

$500.00

$100.00

$400.00

$400.00

$200.00

$200.00

2

$200.00

$40.00

$160.00

$160.00

$80.00

$80.00

3

$80.00

$16.00

$64.00

$64.00

$32.00

$32.00

4

$32.00

$6.40

$25.60

$25.60

$12.80

$12.80

5

$12.80

$2.56

$10.24

$10.24

$5.12

$5.12

6

$5.12

$1.02

$4.10

$4.10

$2.05

$2.05

7

$2.05

$0.41

$1.64

$1.64

$0.82

$0.82

8

$0.82

$0.16

$0.66

$0.66

$0.33

$0.33

9

$0.33

$0.07

$0.26

$0.26

$0.13

$0.13

10

$0.13

$0.03

$0.10

$0.10

$0.05

$0.05

Totals

$833.25

$166.65

$666.60

$666.60

$333.30

$333.30

a)Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table and calculate the new total money supply. How does your answer compare to an economy in which the total amount of the loan is deposited in the banking system and the public does not hold any of the loans in currency? By lending all the money out it increases the money supply. Where the public is holding onto their money it decreases the amount of loans that can go out.

(Hint: Complete the table below when none of the loan proceeds are held in currency following the example for row 1.)

Round

Deposits

Required reserves

Excess reserves

Loans

Loan proceeds held as currency

Loan proceeds deposited

1

$500.00

$100.00

$400.00

$400.00

0.00

$400.00

2

$400.00

$80.00

$320.00

$320.00

0.00

$320.00

3

$320.00

$64.00

$256.00

$256.00

0.00

$256.00

4

$256.00

$51.20

$204.80

$204.80

0.00

$204.80

5

$204.80

$40.96

$163.84

$163.84

0.00

$163.84

6

$163.84

$32.77

$131.07

$131.07

0.00

$131.07

7

$131.07

$26.21

$104.86

$104.86

0.00

$104.86

8

$104.86

$20.97

$83.89

$83.89

0.00

$83.89

9

$83.89

$16.78

$67.11

$67.11

0.00

$67.11

10

$67.11

$13.42

$53.69

$53.69

0.00

$53.69

Totals

$2231.57

$446.31

$1785.26

.

$1785.26

0.00

$1785.26

b)Calculate the Money Multiplier for question 1. a.) based on its computed change in money supply, and calculate the Money Multiplier for question 1. b.) based on its computed change in money supply. What does this imply about the relationship between the public's desire for holding currency and the money multiplier? Which scenario will contribute more to increase in money supply?

What are the specific money multiplier numbers in each scenario?

Section 2: The Federal Reserve Tools to Change Money Supply