Question

Explain how a currency drain affects the size of the money multiplier. ln your explanation, suppose that a bank gains $1 million in new deposits and reserves. Further suppose that the desired reserve ratio is 10 percent and the currency drain is 50 percent.

Answer 1

answer:

Currency Drain Ratio or currency to deposit ratio (c^d) This is the % of banknotes that individual consumers keep in cash, rather than depositing in banks. If consumers deposited all their cash in banks, there would be a bigger money multiplier. But, if people keep funds in cash then the banks cannot lend more

here , money multiplier =[ 1+ c^d] / [ e^d + c^d ] = (1+0.1) / (0.1+0.5)= 1.8333 (here, rr = 0%)

if currency drain or currency to deposit ratio is not there then we have a simple money multiplier which equals

money multiplier = 1 / reserve ratio = 1 /0.1 =10