1)Consider $200,000 worth of currency that is deposited in a commercial bank. a.What happens to the quantity of M1 in the economy?

1)Consider $200,000 worth of currency that is deposited in a commercial bank.

a.What happens to the quantity of M1 in the economy?

b.If the desired reserve ratio is 0.1 and all loans are redeposited then how much money is created?

c.What is the money multiplier when each borrower holds 10% of their loan in currency? [Hint: Use the fact that, for 0<b<1, 1+b+ bxb+bxbxb+… = 1/(1-b)]

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