In Westlandia, the public holds 50% of M1 in the form of currency, and the required

Chapter 0, Problem 12

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In Westlandia, the public holds 50% of M1 in the form of currency, and the required reserve ratio is 20%. 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 reserves20% of the $500 depositagainst 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.) 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 doesnt hold any of the loan in currency? What does this imply about the relationship between the publics desire for holding currency and the money multiplier?