Question

25.       If the currency in circulation (C) is $500 billion, checkable deposits (D) are $900 billion, excess reserves (ER)

are $0.9 billion, and required reserve ratio (r) is 0.10, then compute

            (a)        the currency ratio (c);

            (b)       the excess reserve ratio (e);

            (c)        the money supply (M1); and

            (d)       the money multiplier.

Answer 1

Required reserve ratio (r) is 0.10

(a)        the currency ratio (c) = Currency / Deposit = 500 / 900 = 0.56

(b)       the excess reserve ratio (e) = Excess reserve / Deposit = 0.9 / 900 = 0.001

(c)        the money supply (M1) = Currency in circulation + Checkable deposit = 500 + 900 = $1400 Billion

(d)       the money multiplier =  (1 + C/D) / (C/D + ER / D + rr)

= (1 + 0.56) / (0.56 + 0.001 + 0.1)

= 2.36

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