Question

In: Economics

Suppose that currency in circulation is $100 billion, the amount of checkable deposits is $900 billion,...

Suppose that currency in circulation is $100 billion, the amount of checkable deposits is $900 billion, and excess reserves are $180 billion and the required reserve ratio is 10%. Calculate the money supply, monetary base, the currency deposit ratio, the excess reserve ratio, and the money multiplier

M

MB

C/D

ER/D

m

Suppose depositors lose confidence in the banking system and withdraw $800 billion. How will values found in question 1 change?

M

MB

C/D

ER/D

m

Suppose depositors regain confidence in the banking system and deposit $800 billion but now business lose confidence and excess reserves increase to $360 billion. How will values found in question 1 change?

2 Would raising reserve requirements to 100% be an effective method to reduce monetary factors in the business cycle? Explain in short answer

Solutions

Expert Solution

Money supply consists of deposits of commercial banks and currency hed by the public.

Money supply= $100 +$900= $1,000 billion

Monetary base or high powered money= Currency with public + Required reserve + Excess reserve

= $100 +$ 900*10/100 + $180 = $370 Billion

The currency deposit ratio= Currency held by public/demand deposits = 100 Billion / 900 Billion = 1:9

Excess reserve ratio= Excess reserve / Deposits of Public = 180 Billion / 900 Billion = 1:5

Money muliplier= 1 / Reserve requiremnt = 1/10= 0.1

_________

Money Supply= $ 900 billion + $ 100 Billion = $1,000 Billion

Monetary base or high powered money = Currency with public + Required reserve + Excess reserve

= $100 +$10+ $180 = $ 290 Billion

The currency deposit ratio = Currency held by public / Demand deposits = 900 Billion / 100 Billion = 9:1

Excess Reserve Ratio= Excess reserve / Deposits of public = 180 Billion / 100 Billion = 18:10 = 9:5

Money Multiplier= 1/ Reserve requirement = 1/10 = 0.1

___________

Money Supply = $100 Billion + $900 Billion = $1,000 Billion

Monetary base or high powered money = Currency with public + Required reserve + Excess reserve

= $100 + $90 + $360 = $550 billion

The currency deposit ratio = Currency held by public / Demand deposits = 100 Billion / 900 billion = 1:9

Excess Reserve Ratio= Excess reserve / Deposits of public = 360 billion / 900 billion = 2:5

Money Multiplier= 1/ Reserve requirement = 1/10 = 0.1

Rahul Sunny answered 2 years ago
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