Business

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