Question

QUESTION 1

1. Question 1 Part A
   
   The economy of Bliccogia contains $4000 in currency.
   
   What is the money supply when the citizens of Bliccogia hold all money as currency?

1 points   

QUESTION 2

1. Question 1 Part B
   
   The economy of Bliccogia contains $4000 in currency.
   
   What is the money supply when the citizens of Bliccogia hold all money as demand deposits and banks maintain 100 percent reserves?

1 points   

QUESTION 3

1. Question 1 Part C
   
   The economy of Bliccogia contains $4000 in currency.
   
   What is the money supply when the citizens of Bliccogia hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves?

1 points   

QUESTION 4

1. Question 1 Part D
   
   The economy of Bliccogia contains $4000 in currency.
   
   What is the money supply when the citizens of Bliccogia hold all money as demand deposits and banks maintain a reserve ratio of 10 percent?

1 points   

QUESTION 5

1. (THIS IS AN EXTRA CREDIT QUESTION)
   
   Question 1 Part E
   
   The economy of Bliccogia contains $4000 in currency.
   
   What is the money supply when the citizens of Bliccogia hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10 percent?

Answer 1

Ans(1) The money supply will be $4000 only. As the definition of money supply is equal to (C+DD+OD) where:

C= currency with the public

Dd= Demand deposits of banks

OD= other deposits of the RBI.

As there is all the currency with the public so the money supply is $4000.

Ans(b) If the bank maintain 100% reserves then the money supply will be less or no increase in the supply as bank are keeping 100% reserve.

Ans(c) In part C also if the bank is maintaining 100% then money supply is $4000 because the currency held with the public is $4000 so the money supply will remain same.

Ans (d) If demand deposits reserve is 10% then money supply can increase up to $40000:

1/.1*4000= $40000

It is money supply created in economy by banks through demand deposits by banks.

Ans(e) The money supply is $40000-$4000

= $36000

It is the money supply which is created by banks when then the currency with public as well demand deposits by people and bank's demand deposits ratio is 10%.