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?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

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.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You are given the following information about the economy of​ Nocoin The banks have deposits of​...
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 excess reserves. Suppose that the central bank in Nocoin increases bank reserves by​ $0.5 billion. Explain why the change in the quantity of money is not equal to the...
Suppose that the required reserve ratio is 8% (i.e. rr = RR/D = 0.08), banks hold...
Suppose that the required reserve ratio is 8% (i.e. rr = RR/D = 0.08), banks hold 5% of checking account deposits as excess reserves (i.e. e = ER/D = 0.05), and the currency-to-deposit ratio is 0.5 (i.e. c = C/D = 0.5).      a.   Use this information to calculate the money multiplier.      b.   How would your answers to part (a) change if banks become concerned about risks             involved in making loans and now choose to hold 20% of...
You are given the following information about the economy of​ Nocoin:    The banks have deposits of​...
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,...
Consider an economy where banks keep 25% of deposits as reserves. Currency is 50 billion pesos,...
Consider an economy where banks keep 25% of deposits as reserves. Currency is 50 billion pesos, which constitutes 10% of the monetary base. If the central bank buys 10 billion pesos worth of securities, calculate the percentage change in the monetary base and the percentage change in the money supply assuming that the currency-deposit ratio and the reserve-deposit ratio stay unchanged.
If banks keep one-eighth of their deposits in the form of reserves, and the Fed credits...
If banks keep one-eighth of their deposits in the form of reserves, and the Fed credits Alex's bank account with $8,000, how much does the money supply increase? Question 24 options: a) $16,000 b) $1,000 c) $64,000 d) $8,000 Because the United States has a fractional reserve banking system, banks hold: Question 25 options: a) no currency in their vaults. b) less than 100% of deposits as reserves. c) more than 100% of deposits as reserves. d) 100% of deposits...
Assume that required reserves are 7 percent of deposits and that people hold no currency—all money...
Assume that required reserves are 7 percent of deposits and that people hold no currency—all money is held in the form of checking deposits. a. Suppose that the Federal Reserve purchases $30,000 worth of government bonds from Ellen (a private citizen), and that Ellen deposits all of the proceeds from the sale into her checking account at Z Bank. Construct a balance sheet, with assets on the left and liabilities on the right, to show how Ellen’s deposit creates new...
People hold $200 million of bank deposits but no currency. Banks have made $180 million dollars...
People hold $200 million of bank deposits but no currency. Banks have made $180 million dollars of loans and only hold enough reserves to satisfy reserve requirements. Because of uncertainty, banks choose to hold $10 million more in reserves, meaning that they now have $10 million in excess reserves plus their required reserves. The Fed takes no action. What happens to bank loans? a. they fall by $200 million b. they fall by $100 million c. they rise by $100...
1. Assuming that banks do not hold any excess reserves and people do not want to...
1. Assuming that banks do not hold any excess reserves and people do not want to increase their holdings of currency (bills and coins), a. What would happen when the FED sells a treasury bill worth $100 to Bank of America? (utilize T-accounts for the FED and Bank of America to answer this question) b. If the required reserve ratio is 5%, by how much would total deposits contract when the FED sells that treasury bill to Bank of America?...
supposethatcurrencyincirculationis$600billion,theamountof chequable deposits is $900 billion, and excess reserves are $15 billion and the desired reserve...
supposethatcurrencyincirculationis$600billion,theamountof chequable deposits is $900 billion, and excess reserves are $15 billion and the desired reserve ratio is 10%. a. Calculate the money supply, the currency deposit ratio, the excess reserve ratio, and the money multiplier. b. Suppose the central bank conducts an unusually large open market purchase of bonds held by banks of $1400 billion due to a sharp contraction in the economy. Assuming the ratios you calculated in part (a) remain the same, predict the effect on the...
Assume that bank deposits (D) are $3,200 million, the required reserve ratio (rr) is 10%, and...
Assume that bank deposits (D) are $3,200 million, the required reserve ratio (rr) is 10%, and currency outstanding (C) is $400 million. By how much should the FED change the monetary base (?B) and in which direction in order to decrease the money supply by $100 million? Hint: Start by deriving the more complex money multiplier and also assume that banks choose not to hold any excess reserves (ER = 0, which therefore means ER/D = 0).
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT