Question

1. An economy has a borrowed monetary base of $500 billion and a nonborrowed monetary base of $780 billion. The required reserve ratio is 10%. The total amount of currency in circulation is $1,350 billion. The total checkable deposits is $2,215 billion. The banking system holds a total of $400 billion in excess reserves.

What is the money multiplier? Round your answer to at least 3 decimal places.

2. An economy has a borrowed monetary base of $500 billion and a nonborrowed monetary base of $780 billion. The required reserve ratio is 10%. The total amount of currency in circulation is $1,350 billion. The total checkable deposits is $2,215 billion. The banking system holds a total of $400 billion in excess reserves.

What is the M1 money supply (in billion of $)? Round your answer to at least 2 decimal places. (E.g. $1,234,567,890 should be entered as 1.23)

3. The M1 money supply of an economy is $4,000 billion. The required reserve ratio is 10%. The amount of checkable deposits in the banking system is $1,850 billion. The banking system is holding $450 billion in excess reserves. The economy has a total of $860 billion in borrowed reserves and $670 billion in nonborrowed reserves.

What is the amount of currency in circulation (in billions of $)? Round your answer to at least 2 decimal places. (E.g. $1,234,567,890 should be entered as 1.23)

Answer 1

ANSWER 1

r = required reserve ratio = 0.10

C = currency in circulation = $1350B

D = checkable deposits = $2215B

ER = excess reserves = $400B

M = money supply (M1) = C + D = $1350B + $2215B = $3565B

Then,

c = {C/D} = currency ratio = 0.6094

e = {ER/D} = excess reserves ratio = 0.1805

m = money multiplier = (1+c)/(c+e+r)

= (1+0.6094)/(0.6094+0.1805+0.10)

=1.808

ANSWER 2

(M1) Money Supply = C + D

= $1350B + $2215B = $3565B

ANSWER 3

M1 Money Supply = $4,000 billion

Required Reserve Ratio (r) = 10%

Checkable Deposits (D) = $1,850 billion

Excess reserves (e) = $450 billion

Borrowed reserves = $860 billion

Nonborrowed reserves = $670 billion

Currency in Circulation (C) = M1 - D

= $4,000 billion - $1,850 billion

= $2,150 billion