Question

Assume that the monetary base (B) is $600 billion, money supply is $3300 billion, the reserve deposit ratio (rr) is 0.1.

1) What is the currency deposit ratio (cr)? (5 points)

2) If cr changes to 0.2, but rr and B are unchanged, what is the money supply? (5 points)

Answer 1

Question 1

Monetary base (B) = Currency (C) + Reserves (R)

C + R = $600 billion

R = $600 billion - C

Reserve deposit ratio (rr) = Reserves/Deposit = R/D

0.1 = R/D

R = 0.1D

$600 billion - C = 0.1D

C = $600 billion - 0.1D

Money supply = C + D

$3,300 billion = $600 billion - 0.1D + D

$2,700 billion = 0.9D

D = $3,000 billion

C = Money Supply - Deposit = $3,300 billion - $3,000 billion = $300 billion

Calculate currency-deposit ratio -

Currency-deposit ratio = C/D = $300 billion/$3,000 billion = 0.1

The currency-deposit ratio (cr) is 0.1

Question 2

Now, cr changes to 0.2 but rr and B are unchanged.

cr = C/D

C/D = 0.2

C = 0.2D

rr = R/D

0.1 = R/D

R = 0.1D

B = C + R

$600 billion = 0.2D + 0.1D

0.3D = $600 billion

D = $2,000 billion

C = 0.2D = 0.2 * $2,000 billion = $400 billion

Calculate the money supply -

Money supply = C + D = $400 billion + $2,000 billion = $2,400 billion

The money supply is $2,400 billion.