Question: Assume that, in addition to whatever a bank has, demand deposits grow by $20,000. I Each answer builds on the results of the previous calculations. Calculate multiplier on new deposits only.]
a) Let reserve requirements be 5%. Calculate the addition to the money supply resulting.
b) Now assume that banks hold 2.5% of their demand deposits as excess reserves. Explain why they might wish to do this. Calculate and explain the new addition to the money supply that now results.
c) Assume that customers hold 15% of their demand deposit account values as cash/currency. Calculate and explain the new addition to the money supply that now results.
d) Finally, let consumers conduct 5% of their purchases that they used to pay for by check using digital cash/electronic funds transfers. What does this mean, and why might consumers do this? Give an example from real life. Calculate and explain the new addition to the money supply that now results.
e) Assume that the bank adds $5,000 in Non-Transactions deposits. Total new deposits now equal $25,000, and the fraction of Non-Transactions Deposits is, thus, 20%. Let the reserve requirement on Non-Transactions deposits be 5%. Find the new multiplier.