The monetary base is 2,500 dollars. People hold one-third of the currency in monetary terms (two-thirds as bank deposits). The reserve-deposit ratio (rr) of banks is 1/4. What is the money supply?
Question
The monetary base is 2,500 dollars. People hold one-third of the currency in monetary terms (two-thirds as bank deposits). The reserve-deposit ratio (rr) of banks is 1/4. What is the money supply?
Solution
To calculate the money supply, we need to use the formula for the money multiplier and then multiply it by the monetary base.
The money multiplier formula is 1 + (Currency-Deposit Ratio) / (Currency-Deposit Ratio + Reserve-Deposit Ratio).
Given that people hold one-third of the currency in monetary terms, the Currency-Deposit Ratio is 1/2.
The Reserve-Deposit Ratio is given as 1/4.
So, the money multiplier is 1 + (1/2) / (1/2 + 1/4) = 1 + 2/3 = 5/3 = 1.67 (approximately).
Now, multiply the money multiplier by the monetary base to get the money supply.
Money Supply = Money Multiplier * Monetary Base = 1.67 * 2,500 = 4,175 dollars.
So, the money supply is approximately 4,175 dollars.
Similar Questions
An economy's monetary base is $500 billion, and the reserve-deposit ratio is 0.2. Suppose people hold one-fourths of their money as currency and deposit three-fourths at banks. Then what are the currency-deposit ratio and money supply?
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?
Suppose people are holding $150 million of currency, total deposits in the banking system are $2,500 million, and bank reserves are $500 million. What is the current supply of money?The current supply of money is $ million.
In a specific economy, the central bank reports a monetary base of 8 million dollars. The currency-deposit ratio (cr) in this economy is 0.2. If the money supply in this economy is 24 million dollars, what is the reserve-deposit ratio?
In the economy of Panicia, the monetary base is $2000. People hold a third of their money in the form of currency (and thus two-thirds as bank deposits). Banks hold a third of their deposits in reserve. What are the reserve-deposit ratio, the currency-deposit ratio, the money multiplier, and the money supply?This is a multi answer question. You can select one or more options as the answer.A.the reserve-deposit ratio (rr)=1/3; the currency-deposit ratio (cr) =1/2; the money multiplier = 1.8.; the money supply = 3600.B.the reserve-deposit ratio (rr)=2/3; the currency-deposit ratio (cr) =1/2; the money multiplier = 1.8.; the money supply = 1800.C.the reserve-deposit ratio (rr)=1/3; the currency-deposit ratio (cr) =1/3; the money multiplier = 1.8.; the money supply = 3600.D.the reserve-deposit ratio (rr)=2/3; the currency-deposit ratio (cr) =1/3; the money multiplier = 1.8.; the money supply = 1800.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.