The economy of Baruchville contains 2000 $1 bills. 1. If people hold all money as currency, what is the quantity of money? 2. If people hold all money as demand deposits and banks maintain 100% reserves, what is the quantity of money? 3. If people hold equal amounts of currency and demand deposits and banks maintain 100% reserves, what is the quantity of money? 4. If people hold all money as demand deposits and banks maintain a reserve ratio of 10%, what is the quantity of money? 5. If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10%, what is the quantity of money?

a) $2000

b) $2000

c) $2000

d) $20000

e) $11000

Explanation:

a) If people hold all money as currency:

Quantity of money = 2000 × $1 bills = $2000

b) If people hold all money as demand deposits and banks maintain 100% reserves:

Quantity of money = 2000 × $1 bills = $2000

c)  If people hold equal amounts of currency and demand deposits and banks maintain 100% reserves

Since they are 2000 $1 bills and  people hold equal amounts of currency and demand deposits and banks maintain 100% reserves, the 2000 $1 bills would be divided into two parts, one part for demand deposits and the other part for currency.

Therefore, demand deposits = 1000 × $1 bill = $1000

Currency = 1000 × $1 bill = $1000

Quantity of money = Currency + demand deposits = $1000 + $1000 = $2000

d) If people hold all money as demand deposits and banks maintain a reserve ratio of 10%.

Reserve ratio (r) = 10% = 0.1

Since people hold all money as demand deposits:

Therefore, demand deposits = 2000 × $1 bill  × 1/r = $2000 × 1/0.1 = $20000

Quantity of money = Demand deposits × 1/r = $2000 × 1/0.1 = $20000

e)  . If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10%

Reserve ratio (r) = 10% = 0.1

Since they are 2000 $1 bills and  people hold equal amounts of currency and demand deposits and banks maintain 100% reserves, the 2000 $1 bills would be divided into two parts, one part for demand deposits and the other part for currency.

Therefore, demand deposits = 1000 × $1 bill  × 1/r = $1000 × 1/0.1 = $10000

Currency = 1000 × $1 bill = $1000

Quantity of money = Currency + demand deposit = $1000 + $10000 = $11000