Question

Suppose the following statistics are available for the economy: CU = $60 billion RES = $100 billion DEP = $1000 billion

(a) Calculate the size of the monetary base, the money supply, the reserve—deposit ratio, the currency—deposit ratio, and the money multiplier.
(b) Suppose the currency—deposit ratio rises to .10, while the reserve—deposit ratio and monetary base remain unchanged. Calculate the money multiplier, the money supply, and the new values of CU, RES, and DEP.

Answer 1

a. 6.625.

b. C = 80 billion, DES = 800 billion and RES = 80 billion.

Step-by-step explanation:

a) Monetary base = CU + RES = 160 billion. Money supply = CU + DES = 1060 billion. R-D ratio = 100/1000 = 0.10, C-D ratio = 60/1000 = 0.06, money multiplier = (1 + C-D)/(C-D + R-D) = (1 + 0.06)/(0.10 + 0.06) = 6.625.

b) Money multiplier = (1 + 0.10)/(0.10 + 0.10) = 5.5, money supply = monetary base x multiplier or money supply = 160 x 5.5 = 880 billion. CU + DES = 880 billion and C-D = 0.10. Hence C = 80 billion, DES = 800 billion and RES = 80 billion.