The currency-deposit ratio is 0.8 and the currency is $ 800 billion, and the reserve-deposit ratio is 0.2. what is monetary base?A.1000 billionB.1200 billionC.1500 billionD.800 billion
Question
The currency-deposit ratio is 0.8 and the currency is $ 800 billion, and the reserve-deposit ratio is 0.2. what is monetary base?A.1000 billionB.1200 billionC.1500 billionD.800 billion
Solution
The monetary base is calculated as the sum of currency in circulation and bank reserves.
First, we can find the total deposits using the currency-deposit ratio. The currency-deposit ratio is currency divided by deposits. So, deposits = currency / currency-deposit ratio = 1000 billion.
Next, we can find the reserves using the reserve-deposit ratio. The reserve-deposit ratio is reserves divided by deposits. So, reserves = reserve-deposit ratio * deposits = 0.2 * 200 billion.
Finally, we can find the monetary base by adding the currency and reserves. So, monetary base = currency + reserves = 200 billion = $1000 billion.
So, the answer is A. 1000 billion.
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