Question

# Explain how a currency drain affects the size of the money multiplier. ln your explanation, suppose...

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.

Currency Drain Ratio or currency to deposit ratio (cd) 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+ cd] / [ ed + cd ] = (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

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