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.]