For all questions assume the following starting point: The money supply (M) is composed of currency (C) held by the non-bank private sector (NBPS) and demand deposits (DD) held at banks. Banks are required to hold cash reserves (CR) equal to 10% of their demand deposit liabilities. The remainder of the bank’s DD liabilities is backed by loans (L). Initially, banks have 2000 in cash reserves and the NBPS holds 500 in currency. Currently, banks not hold excess reserves. What are the initial values for DD, L, and M? DD= $20,000 L= $18,000 M= $5,000 What happens to the values in part a, if the NBPS decides to hold an additional 200 in currency? DD = 20,000, L = 18,000, M = 20,700 What would happen to the values in part a if banks decided to hold 2.5% excess reserves? DD = 20,000, L = 17,500, M = 20,500 What happens to the values in part a if concerns about the economy's future caused both b and c to happen? DD = 20,000, L = 17,500, M = 20,700 If nominal GDP is 5.5 times the money supply, what happens to nominal GDP in parts a-d
For all questions assume the following starting point: The money supply (M) is composed of currency (C) held by the non-bank private sector (NBPS) and demand deposits (DD) held at banks. Banks are required to hold cash reserves (CR) equal to 10% of their demand deposit liabilities. The remainder of the bank’s DD liabilities is backed by loans (L). Initially, banks have 2000 in cash reserves and the NBPS holds 500 in currency. Currently, banks not hold excess reserves. What are the initial values for DD, L, and M? DD= $20,000 L= $18,000 M= $5,000 What happens to the values in part a, if the NBPS decides to hold an additional 200 in currency? DD = 20,000, L = 18,000, M = 20,700 What would happen to the values in part a if banks decided to hold 2.5% excess reserves? DD = 20,000, L = 17,500, M = 20,500 What happens to the values in part a if concerns about the economy's future caused both b and c to happen? DD = 20,000, L = 17,500, M = 20,700 If nominal GDP is 5.5 times the money supply, what happens to nominal GDP in parts a-d
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter13: Money And The Banking System
Section: Chapter Questions
Problem 8CQ
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Question
For all questions assume the following starting point: The money supply (M) is composed of currency (C) held by the non-bank private sector (NBPS) and demand deposits (DD) held at banks. Banks are required to hold cash reserves (CR) equal to 10% of their demand deposit liabilities. The remainder of the bank’s DD liabilities is backed by loans (L). Initially, banks have 2000 in cash reserves and the NBPS holds 500 in currency. Currently, banks not hold
- What are the initial values for DD, L, and M?
DD= $20,000 L= $18,000 M= $5,000
- What happens to the values in part a, if the NBPS decides to hold an additional 200 in currency?
DD = 20,000, L = 18,000, M = 20,700
- What would happen to the values in part a if banks decided to hold 2.5% excess reserves?
DD = 20,000, L = 17,500, M = 20,500
- What happens to the values in part a if concerns about the economy's future caused both b and c to happen?
- DD = 20,000, L = 17,500, M = 20,700
- If nominal GDP is 5.5 times the money supply, what happens to nominal GDP in parts a-d
Expert Solution
Step 1
From parts a,b,c,d, we know that,
a) M = 20,500
b) M = 20,700
c) M = 20,500
d) M = 20,700
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