E Normal No Spac Paragraph Styles lfthe Fed now raises requi

E Normal No Spac.. Paragraph Styles lfthe Fed now raises required reserves to 10 percent of deposits, what is the change in reserves? c. 3. (5 points) The economy of Elmendyn contains 1,000 $1 bills. a If people hold all money as currency, what is the quantity of money? b. If people hold all money as demand deposits and banks maintain 100 percent reserves, what is the quantity of money? If people hold equal amounts of currency and demand deposits and banks maintain 100 percent reserves, what is the quantity of money? If people hold all money as demand deposits and banks maintain a reserve ratio of 20 percent, what is the quantity of money? If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 20 percent, what is the quantity of money? c. d. e. 4. (4 points) Suppose that this year\'s money supply is $1 trillion, nominal GDP is $20 trillion, and real GDP is $5 trillion. Note: -2 if didn\'t show your work clearly a. What is the price level? b. What is the velocity of money? 5. T6 points) If the tax rate is 20 percent, compute the before-tax real interest rate and the after-tax real interest rate in each of the following cases. Note:-2 ?fdidn\'t show your work clearly hp 12

Solution

If people hold all money as currency, the quantity of money is $1,000.

If people hold all money as demand deposits at banks with 100% reserves, the quantity of money is $1,000.

If people have $500 in currency and $500 in demand deposits, the quantity of money is $1,000.

If banks have a reserve ratio of 20%, the money multiplier is 1/.20 = 5. So if people hold all money as demand deposits, the quantity of money is

5 x $1,000 = $5,000.

Two equations must be satisfied:
C= D and 5 x ($1,000 – C) = D
Using the first equation in the second gives
5 x ($1,000 – D) = D
$5,000 – 5D= D
6D=5000
D=833.33

C=833.33

D=5*($1,000 –833.33)=166.67

Total money supply=833.33+833.33=1666.66

As per chegg guidelines, Q3 answered.