11. The economy of Elmendyn contains 2,000 $1 bills.a. If people hold all money as currency, what is the quantity of money?
b. If people hold all money as demand deposits and banks maintain 100 percent reserves, what is the quantity of money?
c. If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, what is the quantity of money?
d. If people hold all money as demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money?
e. If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10 percent, what is the quantity of money?

Answers

Answer 1

Answer: Knowing that the economy of Elmendyn contains 2,000 $1 bills:
A. If people held all money as currency, the money is circulated in the economy. The quantity of money would be $ 2000.
B. If people hold all money as demand deposits, and banks maintain 100 percent reserves, the quantity of money will still be $ 2000. Demand deposit is an account that lets you withdraw without further notice. A bank reserve is the currency that the bank does not lend to the public. In this situation, the money circulating in the economy is $ 2000.
C. If people hold equal amounts of currency and demand deposits, and banks maintain 100 percent reserves, the quantity of money is $ 2000. In this situation, the currency is $1000 and the demand deposit is another $1000. With this the total amount of money circulating in the economy is $ 2000.
D. If people hold all money as demand deposits and banks maintain a reserve ratio of 10 percent, the answer is $20 000. The calculation can be done through this:
10 x (2,000 - C)=D
When all money is held as a deposit, there is no currency (C=0)
So 10 x (2,000 - 0) = D
D = $20,000
E. If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10 percent, the quantity of money is $3,636. In this situation, it is given that the amount of currency is equal to the amount of demand deposit.
So the calculation is this:
10 x (2,000-C)=D
10 x (2,000-D)=D
$20,000 - 10D =D
$20,000 =11D
1,818=D
Since C=D, C is also 1,818
C+D= $3,636

Answer 2

Answer:

Final answer:

The quantity of money in Elmendyn's economy can vary based on how much money is held as currency versus demand deposits, and the reserve ratio maintained by banks. If all money is held as currency or if banks maintain 100% reserves, no new money is created, and the money supply is $2000. However, if money is held as demand deposits and banks maintain a lower reserve ratio, the money multiplier effect can significantly increase the money supply.

Explanation:

In the economy of Elmendyn:

If people hold all money as currency, the quantity of money is $2000. This refers to the total economic value of all the money available in the form of currency.
If people hold all money as demand deposits and banks maintain 100 percent reserves, the quantity of money is still $2000. This is because banks are not creating any additional money through loans, as they are maintaining a reserve ratio equivalent to the total deposits.
If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, the quantity of money is still $2000. Here, half the money is held as physical currency and half as demand deposits, with no new money created by banks.
If people hold all money as demand deposits and banks maintain a reserve ratio of 10 percent, the quantity of money can be significantly higher than $2000 due to the money multiplier effect. Here, banks can create new loans from the 90% of deposits that are not held in reserve, which circulate through the economy and effectively increase the money supply.
If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10 percent, the quantity of money again will be higher than $2000, but less than in the previous case as half of the money is held as physical currency, hence not subject to the multiplying effect of bank loans.

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