Question

2. The economy of Wakanda contains 2,000 $1 bills.

1. If people hold all money as currency, what is the quantity of money?

2. If people hold all money as demand deposits and banks maintain 100% reserves, what is the quantity of money?

3. If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, what is the quantity of money?

4. If people hold all money as demand deposits and banks maintain a reserve ratio of 10%, what is the quantity of money?

5. If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10%, what is the quantity of money?

Answer 1

(a)

Quantity of money = Currency held by public = 2,000 x $1 = $2,000

(b)

Quantity of money = Deposits at banks = 2,000 x $1 = $2,000

(c)

Quantity of money = Currency held by public + Deposits at banks = 2,000 x $1 = $2,000

(d)

Deposits = 2,000 x $1 = $2,000

Quantity of money = Deposits / Reserve ratio = $2,000 / 0.1 = $20,000

(e)

Deposits = (1/2) x 2,000 x $1 = $1,000

Currency = (1/2) x 2,000 x $1 = $1,000

Reserve ratio (rr) = 10% = 0.1

Currency-deposit ratio (cr) = Currency/Deposit = $1,000/$1,000 = 1

Money multiplier (mm) = (1 + cr) / (cr + rr) = (1 + 1) / (1 + 0.1) = 2 / 1.1 = 1.82

Quantity of money = Deposits x mm = $1,000 x 1.82 = $1,820