Fractional-reserve Banking and Reserves Loans Loan

BU204/02 Unit 8 June 14, 2011 ? Question In Westlandia, the public operates 50% of M1 in the form of currency, and the required reserve ratio is 20%. 1. Estimate how overmuch the capital supply will increase in response to a new cash deposit of $500 by completing the go with display panel. (Hint The first row shows that the bank must get $100 in minimum reserves20% of the $500 depositagainst this deposit, leaving $ cd in excess reserves that can be bringed out. However, since the public wants to hold 50% of the loan in currency, only $400 ? 0. = $200 of the loan will be deposited in round 2 from the loan grant in round 1. ) RoundDepositsRequired reservesExcess reservesLoansLoan return held as currencyLoan proceeds deposited 1$500. 00$100. 00$400. 00$400. 00$200. 00$200. 00 2$200. 00$40. 00 $160. 00 $160. 00 $80. 00$80. 00 3$580. 00 $116. 00$464. 00$464. 00 $232. 00 $232. 00 4$232. 00 kernels$1512. 00 $256. 00 $1024. 00 $1024. 00 $512. 00 $512. 00 2. How does your answer com pare to an economy in which the total amount of the loan is deposited in the banking system and the public doesnt hold any of the loans in currency? Hint Do another table with none of the loan proceeds held in currency. ) RoundDepositsRequired reservesExcess reservesLoansLoan proceeds held as currencyLoan proceeds deposited 1$500. 00$100. 00$400. 00$400. 00 2$200. 00$40. 00 $160. 00 $160. 00 3 $660. 00$132. 00 $528. 00 $528. 00 totals $1360. 00$272. 00 $1088. 00 $1088. 00 3. What does this imply about the relationship amid the publics desire for holding currency and the money multiplier factor? It implies that if the public holds on to their money there would be more money in circulation and less in banks reverse and then the multiplier would be less.