Question

2. Suppose the total money supply equals $1.8 trillion, and the currency to deposit ratio is.2 and the bank reserves plus cash circulation equal $600 billion. What is the reserve deposit requirement?

Supposed Answer (not sure if it's correct or not): 20%

***please provide a detailed explanation of the formula and steps!

Answer 1

Answer 2

Monetary Base(B) = C + R where C = currency and R = reserves.

=> B = 600 billion(It is given that cash plus reserves = 600 million)

Formula :

Money supply(M) = [(1 + c)/(c + r)]*B where c = currency to deposit ratio = 0.2, r = required reserve ratio and Money supply = 1.8 trillion.

So using above formula we get :

1,8 trillion = [(1 + 0.2)/(r + 0.2)]* 600 billion

=> r + 0.2 = 1.2/3 = 0.4

=> r = 0.2 = 20%

Hence, he reserve deposit requirement