Question

Consider the following values: Banks hold 15% of deposits as reserves so R/D = 0.15 People...

Consider the following values:

Banks hold 15% of deposits as reserves so R/D = 0.15

People hold 33.33% of their monetary assets as currency and 66.66% as deposits so

C/D = 0.33/0.66 = 0.5

a)Calculate the money multiplier

b)What if banks do not lend out any deposits but keep all deposits as reserves so that R = D and R/D = 1. What is the money multiplier? What is the intuition for your answer?

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Homework Answers

Answer #1

the money multiplier (m) is the ratio of the stock of money (M) to the high powered money(H).

a

the stock of money (M)= C+D

where C= currency in circulation

D= demand deposits

M=(C/D+1)D by taking D common

and H= C+R

where H= high powered money

C= currency in circulation

R= reserves kept by the central bank

H=(C/D+R/D)D by taking D common

m= 30/13 =2.31

b) if banks keep all deposits as reserves so money multiplier is also one which means the amount of money that commercial banks can create via loans on reserves will maximize under fractional reserve systems.

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