3) In a country A, the monetary base is $1,000. People hold one third of their...
Homework Answers
(a)
rr = Reserves / Deposit = 1/3 (= 0.33)
cr = Currency / Deposit = (1/3) / (2/3) = 1/2 (= 0.5)
m = (1 + cr) / (cr + rr) = (1 + 0.5) / (0.5 + 0.33) = 1.5 / 0.83 = 1.81
M = Monetary base x m = $1,000 x 1.81 = $1,810
(b)
When people hold half their money as currency, they hold half of their money as deposit.
New cr = (1/2) / (1/2) = 1
m = (1 + 1) / (1 + 0.33) = 2 / 1.33 = 1.50
New money supply = $1,000 x 1.50 = $1,500
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