General Instructions: 

1. Your assignment should have a cover sheet with the following information:

a.    your name;

b.    the course number;

c.    the section number; and,

d.    the date,

2.  You may either copy and paste the questions and the appropriate graphs into your paper, or you may insert your coversheet, your answers and your references into THIS document, renaming it as required in item 4. below.

3. Your answers should follow the APA format by being in double spaced paragraph format, with citations to your sources and, at the bottom of your last page, a list of references.  Your answers should also be in Standard English with correct spelling and punctuation, grammar and style.

4. Unless specified differently by your instructor, your completed assignment should be saved with the following file name format:  course number, an underscore, Section number, an underscore, your LAST name, underscore, your FIRST name, an underscore, and the word “final”.   It will look like this:  BU204_xx _LAST_FIRST_ y   (where the “xx” is the section number and y is the Unit number).

5. Respond to the questions in a thorough manner, providing specific examples of concepts, topics, definitions and other elements asked for in the questions.  Your paper should be highly organized, logical and focused.

6. Maximum grade on format (5 points):

–       correct filename

–       correct APA format for answers (coversheet with name, course number, section

number, Unit number, date, answers double spaced, in Times Roman black 12 point font)  

–       correct citations within answers

–       Standard English with no spelling or punctuation errors

–       correct references at the bottom of the last page.

Question:

 In Westlandia, the public holds 50% of M1 in the form of currency, and the required reserve ratio is 20%.

1. Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table.

(Hint: The first row shows that the bank must hold $100 in minimum reserves—20% of the $500 deposit—against this deposit, leaving $400 in excess reserves that can be loaned out.  However, since the public wants to hold 50% of the loan in currency, only $400 × 0.5 = $200 of the loan will be deposited in round 2 from the loan granted in round 1.)

2. How does your answer compare to an economy in which the total amount of the loan is deposited in the banking system and the public doesn’t hold any of the loans in currency?  (Hint: Do another table with none of the loan proceeds held in currency.)

3. What does this imply about the relationship between the public’s desire for holding currency and the money multiplier?