Question

Consider the following situations. a. Bank reserves are $100, the public holds $200 in currency, and the desired reserve-deposit ratio is 0.25. Find deposits and the money supply. Instructions: Enter your responses as whole numbers. Deposits: $ Money supply: $ b. The money supply is $500 and currency held by the public equals bank reserves. The desired reserve-deposit ratio is 0.25. Find currency held by the public and bank reserves. Instructions: Enter your responses as whole numbers. Currency held by the public: $ Bank reserves: $ c. The money supply is $1,250, of which $250 is currency held by the public. Bank reserves are $100. Find the desired reserve-deposit ratio.

Answer 1

a. Deposits: $800 Money supply: $1,000 b. Currency held by the public: $125 Bank reserves: $375 c. Desired reserve-deposit ratio: 0.2857

Step-by-step explanation:

a. To find the deposits, we can use the formula: deposits = currency / reserve-deposit ratio. In this case, currency = $200 and reserve-deposit ratio = 0.25. Deposits = 200 / 0.25 = $800. To find the money supply, we can add the currency and deposits: money supply = currency + deposits = 200 + 800 = $1,000.

b. To find the currency held by the public, we can use the formula: currency held by the public = reserve-deposit ratio * deposits. In this case, the reserve-deposit ratio = 0.25 and deposits = $500. Currency held by the public = 0.25 * 500 = $125. To find the bank reserves, we can subtract the currency held by the public from the desired reserves: bank reserves = desired reserves - currency held by the public = 500 - 125 = $375.

c. To find the desired reserve-deposit ratio, we can use the formula: desired reserve-deposit ratio = bank reserves / (currency held by the public + bank reserves). In this case, the bank reserves = $100, and the currency held by the public = $250. Desired reserve-deposit ratio = 100 / (250 + 100) = 0.2857 (rounded to four decimal places).

Answer 2

Answer: Please refer to Explanation

Step-by-step explanation:

a) The amount of Deposits are calculated as,

Deposits = Reserve / Reserve Deposit ratio

Deposits = $100 / 0.25

= $400

Deposits are $400

Using the Deposits, Money Supply is calculated by,

Money supply = Currency in circulation + Deposit

Money Supply = $200 + $400

= $600.

Money Supply is $600

b) The currency held by the Public which is equal to bank reserves can be calculated by,

Currency held by public = Money Supply - Deposits

The desired reserve-deposit ratio is 0.25 so we can denote the currency held with C.

That means that

C = 500 - C/0.25

0.25C = 500(0.25) - C

O.25C + C = 125

1.25C = 125

C = $100

Currency held by the public and bank reserves is $100

c. To find the reserve deposit ratio, we can use the Money Supply equation.

Money supply = Currency in circulation + Reserves / Reserve deposit ratio ( denoted Rd)

Which is,

1,250 = 250 + 100 / Rd

1,250 - 250 = 100/ Rd

1,000 = 100 / Rd

1,000Rd = 100

Rd = 100/1,000

Rd = 10%

Reserve Deposit Ratio = 10% or 0.10.