Question

1. If required reserves are $400, excess reserves are $100, deposits are $4000, and the currency ratio is .25, the monetary base is ____________
2. For the next three questions, assume the following:

   R/D = 0.05

   ER/D = 0.00

   C/D = .45

   B = 2000

   R = Total reserves (required plus excess)

   Hint:  D = [1/(R/D + C/D)] × B and C = (C/D) × D

   Compute the following:

   10.   D = _________

   11.  C = _________

   12.  M1 = _________

Answer 1

Given the values of RR, ER and Deposits, the cash reserve ratio is given as

cash reserve ratio= 400/4000=0.1=10%

MB or monetary base= (C/D+ER/D + r)*D ie

C/d= currency to deposit ratio and r is required reserve ratio, D is the deposits

ER/D is the excess reserve to deposit ratio ie 100/4000= 2.5%

Putting the values, we get

MB= (0.1+0.025+0.25)*4000

= 0.375*4000

=$1500

So monetary base is $1500

10) D= [(1/(R/D)+C/D)]*B

Where B is the monetary base

Putting in the values, we get

D= [1/(0.45+0.05)]*2000

=[(1/0.5)]*2000

= 2*2000

=$4000

So deposits are $4000

11) C= C/D*D ie the ratio of currency to deposit times the deposit

C= 0.45*4000

C=$1800

So currency is given as $1800

12) M1 is the form of money which includes deposits and currency with public.

M1= C+D

= $1800+4000

=$5800

(You can comment for doubts)