Question

Consider the following situations a. Bank reserves are $3O0, the public holds $200 in currency, and the desired reserve-deposit ratio is 0.25. Find deposits and the money supply Instructions: Enter your responses as whole numbers Deposits: $ Money supply. $ b. The maney supply is $550 and currency held by the public equals bank reserves The desired reserve-deposit ratio is 025 Find currency held by the public and bank reserves. Instructions: Enter your responses as whale numbers Currency held by the public: $ Bank reserves: S c The money supply is $1,350, of which $350 is currency held by the public. Bank reserves are $200. Find the desired reserve- deposit ratio. Instructions: Enter your response rounded to two decimal places Desired reserve-deposit ratio

Answer 1

Deposits = Bank Reserves/(Reserve-deposit ratio) = $300 / 0.25 = $1,200. Money supply =Currency held by the public+ Deposits = $200 + $1,200 = $1,400. b) In the given situation, bank reserves and currency by the public are equal. Let their value be equal to x and deposits are money supply minus currency held. r=reserves/total deposits 0.25 = x/($550 - x) 137.5 -0.25x = x 1.25x = 137.5 x = 110 So, the currency held by public is $110 Bank reserves are $110 c) As the money supply is $1,350 and the public holds $350 in currency, bank deposits must equal $1,000 If bank reserves are $200, the desired reserve/deposit ratio equals $200/$1000 = 0.20