1) This section deals with increase money supply given two scenarios (see a and b below).
In Westlandia, the public holds 50% of money one (M1) in the form of currency, and the required reserve ratio is 20%.
a) Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table.
b) How does your answer compare to an economy in which the total amount of the loan is deposited in the banking system and the public does not hold any of the loans in currency? (Hint: Complete the table below when none of the loan proceeds held in currency following the example for row 1.)
c) What does this imply about the relationship between the publics desire for holding currency and the money multiplier? Which scenario will contribute more to increase in money supply?
2.) Explain how each of the following changes quantity of money (money supply) in the economy.
fed buys bond
fed auctions credit
fed raises discount rate
fed raises reserve requirement
3) Assume that in a country the total holdings of banks were as follows:
Show that the balance sheet balances if these are the only assets and liabilities.
Assuming that people hold no currency, what happens to each of these values if the central bank changes the reserve requirement ratio to 2%, banks still want to hold the same percentage of excess reserves, and banks do not change their holdings of Treasury bonds? How much does the money supply change by?
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