There are four of you in a group- representing the individuals with currency in an economy. Each of you has $100. Use this information to answer the following questions. Additionally, all banks abide by a reserve ratio of (1/5), regardless of scenario.
Scenario 1
1. What is the Money Multiplier?
2. If all four people hold their money as currency what is the Money supply?
3. If all money is held as demand deposits and every possible backing cycle is completed, what is the total possible money supply?
Scenario 2
1. If the Fed sells a $20 bonds to each of the four people, how much money does each person have (individually) after the bond sale?
2. If all four people hold all their money as currency what is their Money supply?
3. If all money is held as demand deposits and every possible banking cycle is completed what is the total possible money supply?
4. What is the total value of the bond sale (how much money did the Fed receive)?
5. What is the effect of this bond sale on the Money Supply (for such comparisons, always use complete, exhausted banking cycles).
Scenario 3
1. If the Fed buys $20 bonds from each of the four people, how much money does each person have (individually) after the bond purchase?
2. If all four people hold all their money as currency what is their money supply?
3. What is the total value of the bond purchase (i.e. how much money did the Fed spend/pay)?
4. If all money is held as demand deposits and every possible banking cycle is completed what is the total possible money supply?
5. What is the effect of this bond purchase on the Money Supply (for such comparisons, always use complete, exhausted banking cycles).