Question

Suppose that currency in circulation (C) is $100 billion, the amount of checkable deposits (D) is $750 billion, and excess reserves (ER) are $15 billion. Also, the required reserves (RR) are $37.5 billion. Calculate the money supply (M), the total reserves (R), the monetary base (MB), the currency-to-deposit ratio (c), the required reserve ratio (rD), the excess reserve-to-deposit ratio (e), and the money multiplier (m).

Answer 1

Money supply (M) is $850 billion

Total Reserves (R) is $52.5 billion

Monetary Base (MB) is $152.5 billion

Currency-to-deposit ratio (c) is 0.1333

Required reserve ratio (rD) is 0.05

Excess reserve-to-deposit ratio (e) is 0.02

Money multiplier (m) is 5.5738

Explanation:-

Currency in circulation (C) = $100 billion,

Checkable deposits (D) = $750 billion

Required reserves (RR) = $37.5 billion

Excess reserves (ER) = $15 billion

Compute Total Reserves

Total Reserves (R) = Required reserve (RR) + Excess reserve (ER)

                           = $37.5 billion + $15 billion = $52.5 billion

Compute Currency Ratio

Currency Ratio (c) = Currency in circulation (C) / Checkable deposits (D)

                            = 100 / 750 = 0.1333

Compute Required Reserve Ratio

Required Reserve Ratio (rD) = Required reserves (RR) / Checkable deposits (D)

                                          = 37.5 / 750 = 0.05

Compute Excess Reserve Ratio

Excess Reserve Ratio (e) = Excess reserves (ER) / Checkable deposits (D)

                                       = 15 / 750 = 0.02

Compute Money Multiplier

The money multiplier describes the impact of deposits on the overall money supply in the economy. When the central bank pumps in money in the economy, it changes the monetary base which has a multifold effect on the overall money supply due to the money multiplier.

Money Multiplier (m) = (1 + Currency Ratio) /

                                    (Required Reserve Ratio + Excess Reserve Ratio + Currency Ratio)

Money Multiplier (m) = (1 + (100 / 750)) / (0.05 + 0.02 + (100 / 750))

                              = [(750 + 100) / 750] / [((750 *0.7) + 100) / 750]

                              = 850 / (52.5 + 100) = 850 / 152.5

                              = 5.5738

Compute Monetary Base

Monetary base is the aggregate of currency in circulation and the reserves with the banks

Monetary Base (MB) = Currency in circulation (C) +Total Reserves (R)

                               = $100 billion + $52.5 billion = $152.5 billion

Compute Money Supply

Money supply is a measure of money available in an economy for immediate use. It equals the currency in circulation and the deposits at banks.

Money Supply (M) = Currency in circulation (C) + Checkable Deposits (D)

                            = $100 billion + $750 billion = $850 billion