Consider an economy that has two banks with the following information: East Bank
ID: 1196950 • Letter: C
Question
Consider an economy that has two banks with the following information: East Bank: $1600 cash $15,000 DD $2200 Deposit in the Fed $1300 US government bonds West Bank: $600 cash $10,000 DD $1100 Deposit in the Fed $800 US government bonds The economy requires that ten percent of checking be held as required reserves, and the currency ratio is 0.4. Calculate: 1) The desired excess reserves ratio (for the whole economy) 2) Cash held by the public 3) The real-world multiplier 4) The money supply using the simplified definition method 5) The monetary base
Explanation / Answer
1) DD for whole economy is $25,000
ER = AR - RR = (1600 + 2200 + 600 + 1100) - 2500 = $3000
ERR = ER/DD = $3000/$25000 = 0.12
2) Cash held by the public can be obtained from currency ratio (k):
k = CP/DD,
so, 0.4 = CP/25,000
CP = $10,000.
3) Real world multiplier (m) = (1+k)/(rr + er + k) = (1 + .4)/(.1 + .12 + .4) = 1.4/.62 = 2.26.
4) Money Supply (M1) = DD + CP = 25000 + 10000 = $35,000.
5) Monetary Base (B) = AR + CP = 5500 + 10,000 = $15,500.