bonus assignment 7

Vanier College Faculty of Arts, Business and Social Sciences
Introduction to Macroeconomics
Bonus Assignment #5

Get into groups your study groups in order to complete this assignment. Staple your answers to this cover page: Maximum 4 students.

Show all work/calculations as failure to do so will severely diminish your grade.
Where asked to “explain” something, “poor explanations” will receive “poor grades”. Also, the quality of your written work will also be taken into account (e.g. grammar, spelling, punctuation), and so proofread your answers. Consult Omnivox for grading rubric on written take-home assignments.
You are reminded about the College’s policies on copying and plagiarism.

Student Family Name:
Student First Name:
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Student Family Name:
Student First Name:
Student I.D. #:

Student Family Name:
Student First Name:
Student I.D. #:

Student Family Name:
Student First Name:
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Due Date: The day of your midterm #3.


Question #1(16 marks):

A little village isolated from any other human settling has one bank, the bank ABC. Bank ABC has deposits for 10000$ and a desired reserves coefficient of 2%, Assuming that there are no leakages and excess reserves from untaken loans of 2000$. Answer the following questions:

(3 marks) How much currency (cash) is in circulation?
The formula for the total currency in the country is:


Therefore, the total currency in the market is:
Total currency = 10,000 + (10000*0.02) = $10,200

(3 marks) How much money (monetary mass) there is in this little village?
The equation will give the total monetary mass
Total Monetary Mass=money in circulation+deposit+untaken loans
Total monetary mass = 10,000 + 10,200 + 2000 = $ 22,200

(5 marks) Explain why your answers b and a differ.
The difference between the two figures is that the total currency in circulation does not reflect on the entire money in the economy. On this note, many countries in a bid to control inflation limit the money supply, which means that the money in circulation is less than that in the country’s reserves. Furthermore, the government has to ensure that there is some money set aside for loans, which will ensure that people can access it for investments. In this regard, the money in circulation is always less than the total money mass in the country.
(5 marks) All of a sudden, the village has an influx a great number of banks. Assuming that the reserves coefficient do not change, there are no leakages and 0$ in excess reserves, how much monetary mass could be created from the initial 10000$ deposit?
The amount of monetary mass in the country will not register any change because there is no extra money that will be injected into the economy. Precisely, the banks will share the $10,000 deposits since there are no leakages in the market.

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