Question

consumers increase their preferences for cash versus demand deposits. Explain the effect this has on 1- Primary deposits 2- Derivative deposits 3- Credit multiplier 4- Money multiplier 5- Monetary base 6- The money supply

Answer 1

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Question:

Answer:

consumers increase their preferences for cash versus demand deposits then  the effect this has on 1- Primary deposits 2- Derivative deposits 3- Credit multiplier 4- Money multiplier 5- Monetary base 6- The money supply are following as:

Primary deposits:

When the customer or depositors are the direct creator of deposit or a total deposit amount a customer or depositor deposit while opening such accounts. A per the question consumers increase their preferences for cash versus demand deposits then it will decrease the primary deposit. Primary deposit is a combination of term and demand deposit.

Primary deposit = Total Demand Deposit + Total Term Deposit

So, decreasing demand deposit will decreased the primary deposit.

Credit Multiplier:

It is change in change in total deposit created by bank in change in primary deposit or total amount of deposit created by a bank by increase in primary deposit.

Credit Multiplier = Primary Deposit/ Total deposit created

So, when primary deposit increase then credit multiplier increase and vice-versa. So when, consumers increase their preferences for cash versus demand deposits then credit multiplier decrease.

Money Multiplier:

Its indicate how a initial deposit change in money supply in the system. Or we can say that how a change in initial deposit, change in money in money supply. Here change in deposit is change in monetary base. Monetary base is the total currency, notes in the hand of the public or total currency in circulation.

Money Multiplier= Change in money supply/Change in monetary base

So, when monetary base increase money multiplier increase and vice-versa. As per the question the consumers increase their preferences for cash versus demand deposits so, it will increased the monetary base that will decrease money multiplier.

Monetary Base:

Monetary base is the total currency, notes in the hand of the public or total currency in circulation.

Money Multiplier= Change in money supply/Change in monetary base

Monetary Base = Change in money supply/Money Multiplier

We have seen above decreasing primary deposit decreased money multiplier so, decreasing multiplier will increase monetary base.

Money Supply:

It is the total amount of money in circulation or in existence in a country.

We know that,

Money Multiplier= Change in money supply/Change in monetary base

Change in money supply = Money Multiplier*Change in monetary base

We have seen above that decreasing primary deposit decreased money multiplier so, decreasing multiplier will increase monetary base. So, increasing monetary base will increased the money supply.

Derivative deposits:

It is the deposit that is created by bank during credit creation. It is opposite of primary deposit because primary deposit is created by depositors and derivative deposit is created by bank. When, the consumers increase their preferences for cash versus demand deposits then its reduce the capacity of credit creation of bank that reduce the derivative deposit.

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