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3 December, 18:14

Suppose the following statistics are available for the economy: CU = $60 billion RES = $100 billion DEP = $1000 billion

(a) Calculate the size of the monetary base, the money supply, the reserve-deposit ratio, the currency-deposit ratio, and the money multiplier.

(b) Suppose the currency-deposit ratio rises to. 10, while the reserve-deposit ratio and monetary base remain unchanged. Calculate the money multiplier, the money supply, and the new values of CU, RES, and DEP.

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  1. 3 December, 22:13
    0
    a. 6.625.

    b. C = 80 billion, DES = 800 billion and RES = 80 billion.

    Explanation:

    a) Monetary base = CU + RES = 160 billion. Money supply = CU + DES = 1060 billion. R-D ratio = 100/1000 = 0.10, C-D ratio = 60/1000 = 0.06, money multiplier = (1 + C-D) / (C-D + R-D) = (1 + 0.06) / (0.10 + 0.06) = 6.625.

    b) Money multiplier = (1 + 0.10) / (0.10 + 0.10) = 5.5, money supply = monetary base x multiplier or money supply = 160 x 5.5 = 880 billion. CU + DES = 880 billion and C-D = 0.10. Hence C = 80 billion, DES = 800 billion and RES = 80 billion.
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