Question

Economists occasionally speak of “helicopter money” as a short-hand approach to explaining increases in the money supply. Suppose the Chairman of the Federal Reserve flies over the country in a helicopter dropping 10,000,000 in newly printed $100 bills (a total of $1 billion). By how much will the money supply increase if, holding everything else constant:

a.	all of the new bills are held by the public?
b.	all of the new bills are deposited in banks that choose to hold 10 percent of their deposits as reserves (and no one in the economy holds any currency)?
c.	all of the new bills are deposited in banks that practice 100-percent-reserve banking?
d.	people in the economy hold half of their money as currency and half as deposits, while banks choose to hold 10 percent of their deposits as reserves?

Answer 1

1) all of the new bills are held by the public?

Solution: 1 billion

Working: A newly printed $100 bills (a total of $1 billion).

　

2) all of the new bills are deposited in banks that choose to hold 10 percent of their deposits as reserves (and no one in the economy holds any currency)?

Solution: 10 billion

Working: M = 0/0.1 * 1 billion= 10 billion

　

3) all of the new bills are deposited in banks that practice 100-percent-reserve banking?

Solution: 1 billion

Working: A newly printed $100 bills (a total of $1 billion) * 100%

　

4) people in the economy hold half of their money as currency and half as deposits, while banks choose to hold 10 percent of their deposits as reserves?

Solution: 30 billion

Working: M = [(0.5 + 1) / (0.5* 0.1)]* 1 billion= 30 billion