Question

Assume that the currency-deposit ratio is 0.5, the required reserve ratio is 0.1, and the excess reserves to deposit ratio is 0.15. If the monetary base is $2 trillion, find

(a) the amount of currency in circulation in billions of dollars;

(b) required reserves in billions of dollars; and

(c) excess reserves in billions of dollars.

(d) simple deposit multiplier which ignores leakages.

The amount of currency in circulation in billions of dollars:

Required reserves in billions of dollars:

Excess reserves in billions of dollars:

Simple deposit multiplier is:

Answer 1

Currency-deposit ratio (cr) = Currency (C) / Deposits (D) = 0.5

C = 0.5 x D

Required reserve ratio (rr) = Reserves (R) / Deposits (D) = 0.1

R = 0.1 x D

Excess reserve ratio (er) = Excess Reserves (ER) / Deposits (D) = 0.15

ER = 0.1 x D

(a)

Monetary base (MB) = C + R

0.5 x D + 0.1 x D = 2 trillion

0.6 x D = 2 trillion

D = 2 trillion / 0.6 = $3.33 trillion

C = 0.5 x $3.33 trillion = $1.67 trillion

(b)

RR = 0.1 x $3.33 trillion = $0.33 trillion

(c)

ER = 0.15 x $3.33 trillion = $0.5 trillion

(d)

Simple money multiplier = 1 / rr = 1 / 0.1 = 10