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    Money Supply Calculations

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    Suppose the entire economy contains $5000 worth of one-dollar bills.
    (a) If people fail to deposit any of the dollars, but instead hold all $5000 as currency, how large is the money supply?
    (b) If people deposit the entire $5000 worth of bills in banks that are required to observe a 100% reserve requirement, how large is the money supply?
    (c) If people deposit the entire $5000 worth of bills in banks that are required to observe a 20% reserve requirement, how large is the money supply?
    (d) In part (c), what portion of the money supply was created due to banks?
    (e) If people deposit the entire $5000 worth of bills in banks that are required to observe a 10% reserve requirement, how large could the money supply become?

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    Solution Preview

    a) The amount of $5000 is the money supply.
    b) The Money Multiplier (MM) measures the amount that the money supply could change as a result of banks creating new loans. The formula for MM is 1/Required ...

    Solution Summary

    This solution shows how to calculate a country's money supply, given the amount of currency in circulation and the size of its Required Reserve Ratio (RRR). All answers are supported by detailed calculations.

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