Consider an economy in which people wish to hold bank checking deposits worth a total of 5 million goods and currency worth 2 million goods in every period. In addition there is a stock of unintermediated capital worth 10 million goods. Fiat money is the only asset used as currency. Deposits at banks are subject to a reserve requirement of 20 percent. After meeting the reserve requirement, banks invest the remainder of all deposits into capital. The monetary base is $1 millon. Hint: The key to this exercise is understanding the difference between inside and outside money.
a. Find the value (in goods) of a dollar.
b. Find the total nominal money stock as measured by the Federal Reserve's definition of M1.
c. Find the money multiplier.
d. Find the total capital stock.
e. Find the revenue (in goods) from seignorage if the monetary base triples every period.
f. Suppose people want to keep more of their money balances in the form of cash, although their total demand for money does not change. What will happen to each of your answers to part a to e?