Question

In: Economics

A. Calculate the currency-to-deposit ratio (c), the excess-reserves-to-deposit ratio (e) and the money multiplier (m) given...

A. Calculate the currency-to-deposit ratio (c), the excess-reserves-to-deposit ratio (e) and the money multiplier (m) given the following values:

rr = 0.20 C = $320 billion D = $1,000 billion ER = $60 billion

B. Calculate total required reserves (RR), total actual reserves (AR) and the monetary base (MB).

C. Now assume the FED lowers the required reserve ratio to 0.10. Calculate the new money multiplier (m’) and the new money supply (M1).

D. Calculate the new level of deposits (D’) and currency in circulation (C).

E. Calculate the new level of required reserves (RR’) and excess reserves (ER’).

Expert Solution

A. Calculate the currency-to-deposit ratio (c), the excess-reserves-to-deposit ratio (e) and the money multiplier (m) given the following values:

rr = 0.20 C = $320 billion D = $1,000 billion ER = $60 billion

currency-to-deposit ratio = C/D = 320/1000 = 32%. or 0.32

excess-reserves-to-deposit ratio = ER/D = 60/1000 = 6%

Money multiplier = (1 + c)/(rr + c + e) = (1 + 0.32)/(0.20 + 0.06 + 0.32) = 2.2758

B. Calculate total required reserves (RR), total actual reserves (AR) and the monetary base (MB).

Total required reserve = 20% of deposits = 20% of 1000 = 200 billion

Total reserves = RR + ER = 260 billion

Monetary base = currency + reserves = 320 + 260 = 580 billion

C. Now assume the FED lowers the required reserve ratio to 0.10. Calculate the new money multiplier (m’) and the new money supply (M1).

New money multiplier = (1 + 0.32)/(0.10 + 0.06 + 0.32) = 2.75

Money supply = monetary base x multiplier = 580 x 2.75 = 1595 billion

D. Calculate the new level of deposits (D’) and currency in circulation (C).

C + D = 1595 billion

C/D = Assuming it to be unchanged = 32% so C = 32% of D

0.32D + D = 1595 billion

Hence Deposits = 1208.33 billion

Currency =386.67 billion (32%)

E. Calculate the new level of required reserves (RR’) and excess reserves (ER’).

RR = 10% of 1208.33 billion = 120.83 billion

ER = 6% of 1208.33 billion = 72.5 billion.

Rahul Sunny answered 2 years ago

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