Question

We know that the required reserve ratio (rrd) is 10%. Assume that the banking system has...

  1. We know that the required reserve ratio (rrd) is 10%. Assume that the banking system has an excess reserves equal to $ 4 billion. Further, the currency in circulation equals $ 450 billion, and the total amount of checkable deposits equals $900 billion. Based on these numbers, calculate followings,

(a) required reserves held by the banking system

          (b) total reserves held by the banking system,

          (c) monetary base

         (d) total money supply (M1)

(e) the money multiplier

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Answer #1

Sol:

Required reserve ratio (rrd) = 10%

Excess reserves (ER) = $4 billion

Currency in circulation (CC) = $450 billion

Total amount of checkable deposits (CD) = $900 billion

(a) Required reserves held by the banking system (RR) = CD x rrd

Required reserves held by the banking system = $900 billion x 10% = $90 billion

b) Total reserves held by the banking system (TR) = RR + ER

Total reserves held by the banking system = $90 billion + $4 billion = $94 billion

c) Monetary base (MB) = CC + TR

Monetary base = $450 + $94 = $544 billion

d) Total money supply (M1) = CD + CC

Total money supply (M1) = $900 billion + $450 billion = $1,350 billion

(e) Money multiplier = M1 / MB

Money multiplier = $1,350 billion / S544 billion = 2.48

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