Question

3. (A) Calculate the money multiplier for the following information: the required reserve ratio is 10%, currency in circulation is $400 billion, checkable deposits are $800 billion, and excess reserves are $0.8 billion. (10pts)

money and banking

Answer 1

1) Solution: 2.5

Working: c = C/D = 400/800 = 0.5; r= 0.1; e = E/D = 0.8/800 = 0.001

Multiplier = [(1+c)/(r+e+c)] = (1.5/0.601)= 2.49584

2) The money supply and the money multiplier are negatively related to the excess reserves ratio, required reserve ratio and current ratio. Thus the Fed can reduce with the reducing the excess reserves ratio, required reserve ratio and current ratio