Spielberg takes $100 out of his piggy bank and deposits it in his Hollywood Bank checking account. By how much does the total amount of deposits in the banking system increase:
(i) if this $100 stays in the banking system as reserves, and
(ii) if banks hold reserves equal to 10 percent of deposits?
By how much does the money supply increase in each case? Note that money supply consists of currency and demand deposits.
3. Use AD-AS diagrams to explain the short-run and long-run effects of each of the following events on output and the price level. Assume that policymakers take no action.
a) A severe earthquake damages factories along the west coast
b) Stock market crash