Question

Answer the question clearly. Make sure all of your graphs are properly labeled.

1. Write out the generic formula for the advanced money multiplier (4 points)
2. Explain what will happen to the money multiplier and the money supply when each of the following decrease (2 points each)

The C/D ratio

The R/D ratio

The Monetary Base

c. Consider the following data.

                        Currency                     $100 billion

                        Bank reserves             $200 billion

                        Checkable deposits    $1,500 billion

Calculate the monetary base, the money multiplier, and the M1 money supply. (4 points)

Answer 1

A) advanced money multiplier=1/(r+c)

r = share of Monetary base,which is taken as reserves by banks.

c=share of total monetary base that is hold by people as curreny.

b)C/D ratio = credit to deposit ratio ,which tella how much are giving loans of their total deposit.If this ratio is Decrease,means bank is not giving all money that is for giving loans ,which Increases reserves and Decrease Money multiplier.

R/D ratio = reserve to deposit ratio ,which tells how much reserve are banking of total deposit.If this Decrease means firm is keeping less money at itself and giving more loans ,so money multiplier will increase.

C) Monetary base = currency+ bank reserve=100+200=300

c=100/1600=0.0625

r=200/1600=0.125

Money multiplier=1/(0.0625+0.125)=1/0.1875=5.33

M1 money supply= curreny+ checkable deposit=100+1500=1600