Section 1: Deposits, Reserves and Loans
This section deals with increase in money supply given two scenarios (see "a" and "b" below). In Westlandia, the public holds 50% of money one (M1) in the form of currency, and the required reserve ratio is 20%.
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.
(Hint: The first row shows that the bank must hold $100 in minimum reserves ? 20% of the $500 deposit ? against this deposit, leaving $400 in excess reserves that can be loaned out. However, since the public wants to hold 50% of the loan in currency, only $400 0.5 = $200 of the loan will be deposited in round 2 from the loan granted in Round 1.)
a)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?
Table 1a: Total new Loans deposited = $333.30 and initial deposit was $500
A deposit of $500 is creating money of $333.30
Money multiplier = 333.3/500 = 0.67
Table 1b: Total new Loans deposited = $1785.26 and initial deposit was $500
A deposit of $500 is creating money of $1785.26
Money multiplier = 1785.26/500 = 3.57
?
AutoSave On hy KJBU204M4moneybanking_Templ... - Last Modified: Mon at 11:10 PM - Search Kevin James KJ X File Home Insert Design Layout References Mailings Review View Help Acrobat Share Comments LO A" A Aa AaBbCc[ AaBbCc AaBbCcl Find * E Paste BIU XX ADA Cc Replace 1 Body Text 1 Heading 1 1 Heading 2 - Select Create and Share Request Dictate Sensitivity Editor Adobe PDF Signatures Clipboard Font Paragraph Styles Editing Adobe Acrobat Voice Sensitivity Editor be deposited in round 2 from the loan granted in Round 1.) Round Deposits Required Excess Loans Loan proceeds Loan proceeds reserves reserves held as currency 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 b) 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? (Hint: Complete the table below Page 1 of 5 118 of 1620 words X when mann of the lan a sen hold in sou following the Focus + 100% H Search for anything O e e ? 1:20 AM 6/19/2020AutoSave On KJBU204M4moneybanking_Template - Saving... . Search Kevin James KJ X File Home Insert Design Layout References Mailings Review View Help Acrobat Table Design Layout Share Comments Arial 12 ~ A" A Aa * AaBbCc[ AaBbCc AaBbCcl Find E Paste BIUxx ADA 1 Body Text 1 Heading 1 1 Heading 2 = Cc Replace Select Create and Share Request Dictate Sensitivity Editor Adobe PDF Signatures Clipboard Font Paragraph Styles Editing Adobe Acrobat Voice Sensitivity Editor [BU204M4] Assessment Template Required Excess Loan proceeds Loan proceeds Round Deposits reserves reserves Loans held as currency 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 $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 $2231.56 $446.31 $1785.25 $1785.25 0.00 $1785.25 c) 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 Page 2 of 5 1619 words X currency and the money multiplier? Which scenario will contribute more to increase in money Focus + 100% Search for anything O e e ? A 1:20 AM 6/19/2020
