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. a. What are the initial values for DD, L, and M? DD= $20,000 L= $18,000 M= $5,000 b. 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 c. What would happen to the values in part a if banks decided to hold 2.5% excess reserves? The value of excess reserve is 500. Thus the new L is $17,500 (18,000-500). The excess reserve does not affect the DD and C. It only affects the value of L. Since the L: is decreases by $500, the new value of M would decreases by $500 from the initial money supply. d. 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 e. 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
a. What are the initial values for DD, L, and M?
DD= $20,000 L= $18,000 M= $5,000
b. 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
c. What would happen to the values in part a if banks decided to hold 2.5% excess reserves?
The value of excess reserve is 500. Thus the new L is $17,500 (18,000-500). The excess reserve does not affect the DD and C. It only affects the value of L. Since the L: is decreases by $500, the new value of M would decreases by $500 from the initial money supply.
d. 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
e. If nominal GDP is 5.5 times the money supply, what happens to nominal GDP in parts a-d
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