Question

You are given the following information about the economy of​ Nocoin:

  

The banks have deposits of​ $300 billion. Their reserves are​ $15 billion, two thirds of which is in deposits with the central bank. Households and firms hold​ $30 billion in bank notes. There are no​ coins!

  

The banks have no unplanned reserves.

  

The Bank of​ Nocoin, the central​ bank, decreases bank reserves by​ $0.5 billion.

    

Calculate the money multiplier in Nocoin. What happens to the quantity of​ money, deposits, and​ currency?

The money multiplier is

The quantity of money decreases/increases by$__billion.

The quantity of deposits decreases/increases by ​$__billion.

The quantity of currency  decreases/increases by $__billion.

Answer 1

1) Money multiplier = 7.33
Working: We have a = currency drain ratio = 0.1; b = desired reserve ratio = 0.05
money multiplier = (1 + a) / (a + b) = (1 + 0.1) / (0.1 + 0.05) = 7.33
2) Quantity of money decreases by $3.67 billion
Working: money multiplier * decrease in monetary base = 7.33 * 0.5 = 3.67 billion
3) Quantity of deposits decreases by $3.34 billion.
Working: Quantity of money decreases = $3.67 billion; currency drain = ($30 billion/$300 billion) * 100 = 10% or 0.1
Thus deposit reduces by $3.34 billion and currency falls by $0.33 billion
4) Quantity of currency decreases by $0.33 billion
Working: Quantity of deposits decreases = $3.34 billion; currency drain = 0.1;
Thus deposit reduces by $3.34 billion and currency falls by by $0.33 billion