1. Complete the table below by calculating the values for the empty cells. Remember that
MM = 1/(RRR + ERR).
Change in RRR ERR MM Change in the
reserves money
supply
$1,000 8% 2% 10 $10,000
$2,000 10% 2% 8.33 $16,660
$3,000 10% 4% 7.14 $21,420
$4,000 11% 5% 6.25 $25,000
$5,000 15% 1% 6.25 $31,250
2. When Renee got paid last week, she deposited her $1,000 paycheck in her bank
account.
Let's say that her bank holds required reserves of 10% and excess reserves of 10%.
Explain
why the money supply does not increase at all as a result of her being paid.
Ten percent are needed reserves and ten percent are surplus reserves. This indicates that none
of the $1000 is being loaned out. There isnt any new money in the economy because the bank
isnt lending out the funds. Renee merely transfers the $1000 from her wallet to her bank
account.
MM = 1/(RRR + ERR).
Change in RRR ERR MM Change in the
reserves money
supply
$1,000 8% 2% 10 $10,000
$2,000 10% 2% 8.33 $16,660
$3,000 10% 4% 7.14 $21,420
$4,000 11% 5% 6.25 $25,000
$5,000 15% 1% 6.25 $31,250
2. When Renee got paid last week, she deposited her $1,000 paycheck in her bank
account.
Let's say that her bank holds required reserves of 10% and excess reserves of 10%.
Explain
why the money supply does not increase at all as a result of her being paid.
Ten percent are needed reserves and ten percent are surplus reserves. This indicates that none
of the $1000 is being loaned out. There isnt any new money in the economy because the bank
isnt lending out the funds. Renee merely transfers the $1000 from her wallet to her bank
account.
