Pages: 3 (508 words) Published: May 11, 2013
Assignment

Emily Neeley

Unit 8 Assignment

Professor Fazlul Miah

BU204-02

03/25/2012

Question:

In Westlandia, the public holds 50% of M1 in the form of currency, and the required reserve ratio is 20%.

1. Estimate how much the money supply will increase in response to a new cash deposit of \$500 by completing the accompanying table.

(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.)

|Round |Deposits |Required reserves |Excess reserves |Loans |Loan proceeds held as |Loan proceeds | | | | | | |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 |  | |3 | \$80.00 | \$16.00 | \$64.00 | \$64.00 | \$32.00 |  | |4 | \$32.00 | \$6.40 | \$25.60 | \$25.60 | \$12.80 |  | |5 | \$12.80 | \$2.56 | \$10.24 | \$10.24 | \$5.12 |  | |6 | \$5.12 | \$1.02 | \$4.10...