1) how do you calculate the deposit expansion multiplier.
2) describe the link between the monetary base and the money supply.
(1)
Deposit expansion multiplier (MM) = (1 + cr) / (cr + er + rr), where
cr: Currency drainage ratio = Currency / Checkable deposits
er: Excess reserves ratio (maintained by commercial banks) = Excess reserves / Checkable Deposits and
rr: Required reserves ratio (Set by central bank) = Required reserves / Checkable Deposits.
(2)
Money supply = Monetary base (MB) x MM
Money supply = MB x [(1 + cr) / (cr + er + rr)]
Therefore, MM remaining unchanged, the higher (lower) the monetary base, the higher (lower) the money supply.
1) how do you calculate the deposit expansion multiplier. 2) describe the link between the monetary...