Suppose that nonbank public always holds cash in the amount of 5percent of their checkable...

Suppose that nonbank public always holds cash in the amount of 5 percent of their checkable deposits. The total banking system reserves (R) equal $60 billion. The total banking system checkable deposits (D) subject to reserve requirements are $500 billion. The required reserves ratio (rD) is 10 percent. What is the amount of currency holding (C)? What is the amount of required reserves (RR)? What is the amount of excess reserves (ER)? Calculate the value of the money multiplier (m). What is the monetary base (MB)? What is the total money supply (M)? Show all your calculations

Expert Solution

Ans.
a) Monetary base = Cash + Reserves = 5% of Checkable deposits + $60 billion = $25 billion + $60 billion = $85 billion

b) Required Reserves = Required Reserve Ratio*Checkable Deposits = 0.10*500 billion = $50 billion

c) Excess reserves = Total Reserves - Excess Reserves = 60 billion - 50 billion = $10 billion

d) Money Multiplier = (1 + Cash/Checkable Deposits)/ [(Cash/ Checkable Deposits) + (Excess reserves/ Checkable Deposit) + (Required Reserves/ Checkable Deposits)]
=> Money Multiplier = 6.1764

e) Money Supply = Money Multiplier * Monetary Base = 6.1764 *85 billion = $525 billion

Rahul Sunny answered 2 years ago

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