In Westlandia, the required reserve ratio is 20%, and the general population holds 50% of M1 of the country's money in the form of currency. Fill out the accompanying table to calculate how much the money supply will rise in response to a new 500cashdeposit.(Hint:Thetoprowindicatesthatthebankmustretainaminimumof $100$ in reserves −20% against the $500 deposit, leaving $400 in excess reserves ($400) that can be given out. However, since the public desires to keep 50% of the loan in cash, only $400×0.5=$200 will be deposited from the loan given in round one in round two).
How does your response differ from an economy where the entire loan amount is deposited in the banking system and no part of the loan is held by the general people in the form of currency? What does this say about how the money multiplier and the public's willingness to hold currency are related?
Round 12456789 Total after 10 rounds Deposits $500.00200.00???????? Required reserves $100.00????????? Excess reserves $400.00????????? Loans $400.00????????? Held as currency $200.00?????????
