Question

consider the following data:

currency 850 billion

checkable deposits 700 billion

bank reserves. 700 billion

Calculate ghe values of currency-to- deposit ratio, the ratio of total reserves to deposits, the monetary base, the money multiplier and the M1 money supply

Answer 1

Currency (C) = 850 billion

Checkable Deposits (D) = 700 billion

Bank Reserves (R) = 700 billion

a) Now the Currency to Deposit ratio (CD) is the amount of Currency(C) people holds as a fraction of their holdings of Checkable Deposits(D).

Currency to Deposit ratio (CD) =

Therefore, Currency to Deposit ratio (CD) = 17 : 14

b) The ratio of Total Reserves to Deposit (RD) is the fraction of Deposits(D) that bank hold in Reserve(R).

Total Reserve to Deposit ratio (RD) =

Therefore, Total Reserve to Deposit ratio (RD) = 1 : 1

c) The monetary base (B) is the total number of dollars held by the public as Currency(C) and by the banks as Reserves (R).

Monetary Base (B)= Currency(C) + Bank Reserves(R) = 850+700 = 1550 billion

d) The Money Multiplier(m) is defined as the proportion

        m =

Therefore, the Money Multiplier (m) = 1

e) M1 Money Supply is the product of Money Multiplier(m) and Monetary Base(B).

Therefore, M1 Money Supply = Money Multiplier(m) * Monetary Base(B)

                                                     = 1 * 1550

                                                      = 1550 billion