Calculate the initial values of the variables

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Reference no: EM131053426

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	Column C
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)

Reference no: EM131053426

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