Question

Part 9

If deposits in the banking system are $540, while the reserve ratio is 0.2 and the currency to deposit ratio is 0.09, then:

a) Calculate the total demand for high powered money.

b) Calculate the money multiplier.

(1 mark each for sub-parts a and b (no word count requirement applies) - Part 9 worth 2 marks)

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(0.5 marks)

2. Include a Reference list to acknowledge sources used and cited within your assignment

(1 mark)

Answer 1

Part 9

a) The total deposit in the banking is $540 and the required reserve ratio is given as 0.2. Therefore, the amount of the total reserve that the commercial banks and other financial institutions within the banking system are required to hold=(0.2*$540)=$108. The current to deposit ratio is 0.9 and the total deposit in the banking system is $540. Now, let's suppose the overall currency circulation by public in the system be C. The total demand for high powered money or monetary base is the summation of the total reserve held by the commercial banks and other financial institutions in the system and the C.

Therefore, the total amount of currency or C, in this case would be:-

C/540=0.9

C=$486

Hence, the total currency in circulation within the system is $486 and the total reserve held by commercial banks and other financial institutions in the system is $108. Thus, using the mathematical formula to calculate the demand for high powered money or monetary base, the demand for high powered money or monetary base in this instance=($486+$108)=$594

b) The money multiplier can be mathematically calculated as 1 divided by the reserve ratio and the reserve ratio, in this case is 0.2. Hence, the money multiplier in this instance=1/0.2=5

Reference

https://www.albany.edu/~bd445/Economics_350_Money_and_Banking_Slides_Spring_2013/Money_Multiplier.pdf