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9 September, 09:51

Suppose that:

r = required reserve ratio = 0.15

c = {C/D} = currency ratio = 0.45

e = {ER/D} = excess reserve ratio = 0.05

MB = the monetary base = $3,000 billion

Given that the formula for the money multiplier is (1 + c) / (r + e + c) , find the value for M , the money supply.

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  1. 9 September, 12:17
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    0.223

    Explanation:

    The values given are:

    r = required reserve ratio = 0.15

    c = {C/D} = currency ratio = 0.45

    e = {ER/D} = excess reserve ratio = 0.05

    MB = the monetary base = $3,000 billion

    Therefore, money multiplier is:

    (1 + c) / (r + e + c)

    = (1 + 0.45) / (0.15 + 0.05 + 0.45)

    = (1.45) / (0.65)

    = 2.23

    money multiplier=2.23

    Money supply = change in reserves * money multiplier

    change in reserve=0.15-0.05

    =0.1

    money multiplier=2.23

    Money supply = 0.1 * 2.23

    = 0.223

    Thus, the money supply is 0.223.
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