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Suppose that initially the money supply of a small economy is made up of 1,000 $1 bills. a) If people hold all their money and
Suppose that initially the money supply of a small economy is made up of 1,000 $1 bills. a) If people hold all their money and do not deposit any of it, what is the money supply? b) Suppose that people deposit the entire $1,000 into their checking accounts. Further suppose that banks have a 100% required reserve ratio. Now what is the money supply? What happened? c) Suppose that people deposit the entire $1,000 into their checking accounts. Further suppose that banks now have a required reserve ratio of 5%. How large could the money supply become now? d) How much money did banks "create"? e) What is the increase in the money supply if the required reserve ratio had been 10% instead of 5%? What happens to the money supply as the required reserve ratio increases or decreases
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