Question

Consider the following monetary data for December of 2009: currency in circulation was $865.8 billion, total checkable deposits were $829.7 billion, total reserves were $1,099.8 billion, and the required reserve ratio was 10%. Using these data, answer the questions below:

A. Calculate the currency-deposit ratio, c, the amount of excess reserves, ER, and the excess reserve ratio, e.

B. Calculate both the simple multiplier, msimple, and multiplier, m. Compare these two multipliers.

Answer 1

Hi,

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Question:

A). Answer:

currency in circulation = $865.8 billion

Total checkable deposits = $829.7 billion

Total reserves = $1,099.8 billion

Required reserve ratio = 10%

Currency-deposit ratio = $865.8 billion/$829.7 billion = 1.04

The amount of excess reserves = Total reserve - Required reserve

Required reserve =  $829.7 billion * 10% = $82.97 billion

The amount of excess reserves = $1,099.8 billion - $82.97 billion = $1016.83 billion

Excess reserve ratio = $1016.83 billion/$829.7 billion = 1.2255 = 1.2255 100 = 122.22%

B). Answer:

Simple Multiplier = 1/RR

= 1/10% = 10

Money supply = Money multiplier * Monetary base

= 10 * ($1,099.8 +  $829.7 billion) = $19295 billion

Multiplier =

[RR = Reserve/ Deposits = $1,099.8 billion/ $829.7 billion = 1.3233 = 132.55

Multiplier = = 1/1.3233 = 0.75]

Money multiplier (considering excess reserve ratio) = 1/122.22% = 0.81

Higher the  money multiplier means lower the money supply and vice-versa. When the reserve ratio is high its decrease money supply and vice-versa. So, in case of Simple Multiplier the money supply will higher.

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