Assignment:
The economy of the Village of Pantherville contains 50,000 $1 bills. [Briefly explain how you arrived at each of your answers.]
a) If people in Pantherville hold all money as currency, what is the quantity of money?
b) If people hold all money as demand deposits and the Bank of Pantherville maintains 100% reserves, what is the quantity of money?
c) If people hold equal amounts of currency and demand deposits and the Bank of Pantherville maintains 100% reserves, what is the quantity of money?
d) If people hold all money as demand deposits and the Bank of Pantherville maintains a reserve ratio of 10%, what is the maximum quantity of money?
[Hint: What is the money multiplier with a reserve ratio of .1?]
e) If people hold equal amounts of currency and demand deposits and the Bank of Pantherville maintains a reserve ratio of 10%, what is the qualtity of money? [This is more challenging, but some simple algebra can be of assistance.
Consider the following equations:
1) M = C + D (quantity of money equals currency + deposits)
2) C = D (currency must equal demand deposits)
3) 10*($50,000 - C) = D (total demand deposits equals the money multiplier times available reserves. In this instance total available reserves are (50,000 - currency holdings)
Substitute (3) into (2) and solve for C
Then once you have C, you can solve for M given that C must equal D.]