Question

Assume that the currency ratio is​ 50% and the excess reserve ratio​ 30%. The money multiplier is 1.7 and deposits in the system​ $100 million. Given this information

​1) The required reserves rate is​ (round to the nearest​ tenth)

nothing​%

​2) The amount of total reserves is​ (round to the nearest​ tenth)

​$nothing

millions

​3) The monetary base is equal to​ (round to the nearest​ tenth)  

​$nothing

millions

​4) The monetary supply is equal to​ (round to the nearest​ tenth)

​$nothing

millions

​5) The currency in circulation is equal to​ (integer)

​$nothing

million

Answer 1

Ans. Let, required reserve ratio, rr = ?

Excess reserve ratio, er = 30% or 0.30

Currency to deposit ratio, cc = 50% or 0.50

Monet multiplier, m = 1.7

Deposits, D = $100 million

Currency in circulation , C = ?

Monetary base, MB = ?

Money Supply, MS = ?

a) m = (1+cc)/(cc+er+rr) = 1.7

=> (1+0.50)/(0.50+0.30+rr) = 1.7

=> rr = 0.08235 or 8.235%

b) Total Reserves = rr*D = $8.2353 million

c) Monetary Base = C + D

and C = D*cc = 100 million*0.50 = $50 million

=> MB = C + D = 100 + 50 = $150 million

d) MS = m*MB = 1.7*150 million = $255 million

e) C = D*cc = 100*0.5 = $50 million

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