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. Suppose the following conditions currently exist in the economy Demand deposits and other checkable deposits equal $2,000 billion Currency held by the public equals $500 billion

. Suppose the following conditions currently exist in the economy.

· Demand deposits and other checkable deposits equal $2,000 billion.

· Currency held by the public equals $500 billion.

· The Federal Reserve requires that 3% of deposits below $50 million must be held as reserves while the reserve requirement on deposits above $50 million is 10%. Initially $600 billion is subject to the 3% reserve requirement while the remaining $1,400 billion is subject to the 10% reserve requirement.

· Total reserves equal $250 billion.

(a) Calculate the initial values of the variables listed in the first column and fill in column B.

(b) Suppose the public increases its currency holding from $500 billion to $600 billion by withdrawing an additional $100 billion from their demand deposit accounts. Assume that the withdrawals reduce demand deposits subject to the 3% reserve requirement by $40 billion and that deposits subject to the 10% reserve requirement decrease by $60 billion. Calculate the effects of this change on the variables in the first column and place those values in their appropriate places in column C.

 

Variable of Interest

Column B (14 points)

Column C (7 points)

currency ratio (C/D)

 

 

total reserves (R)

 

 

required reserves (RR)

 

 

excess reserves (ER)

 

 

required reserve ratio (rd)

 

 

excess reserve ratio (ER/D)

 

 

money multiplier (mm)

 

 

monetary base (MB)

 

 

money supply (M1)

Apr 29 2020 View more View Less

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