Question

11. Regarding the connections among the various aggregate monetary variables, which of the following is true?

a. The quantity of money in an economy (M) = Currency held by the public (C) − Reserves held by banks (R)

b. The monetary base (B) = Currency held by the public (C) + Assets held by banks (A)

c. The monetary base (B) = Currency held by the public (C) + Reserves held by banks (R)

d. The money multiplier (m)= Currency held by the public (C) / Assets held by banks (A)

12. Suppose the monetary base is B = $800 billion, the reserve-deposit ratio is rd = 0.1, and the currencydeposit ratio is cd = 0.8. Calculate the economy’s quantity of money (M).

a. $89 billion

b. $711 billion

c. $889 billion

d. $1,600 billion

Answer 1

Ans. 11 C) The monetary base ( B) = currency held by the public (c) + reserves held by the bank (R)

MB= C+R, A monetary base is the sum of currency held by the public and commercial banks deposits amount held with the central bank's reserves. It is also called high powered money.

Ans. 12 d) $1,600 billion

Money supply (M)= [ (cd+1) /(cd +rd)] X Monetary base (MB)

where [ (cd+1)/(cd+rd)] is money multiplier (m)

cd= currency deposit ratio

rd= reserve deposit ratio

Money supply = [(0.8+1)/(0.8+0.1)] X $800 billion

= 1.8/0.9 X $800 billion

= $1,600 billion

hence, the economy's quantity of money(M) is $1,600 billion