Answer to Question #207911 in Economics of Enterprise for bobby valentino

Question

Exercise Assuming that the value of reserves is 5000 monetary units and the ratio of mandatory reserves is 10%: - calculate deposit on demand (D) - let's assume that the reserve ratio changes from 10% to 20%, how will this affect the creation of bank money? - interpret the results obtained, was it restrictive or expansive

Answer 1

Given in the question -

Value of reserves = 5000 monetary units 

reserve ratio = 10%

 

Money multiplier = 1$\div$ Reserve ratio

Money Multiplier = 1$\div$ 0.1

Money multiplier = 10

Required reserve = required ratio$\times$ deposits 

5000 = 0.1$\times$ deposits

50,000 = deposits

Now, the reserve ratio changes from 10% to 20% so, money multiplier becomes 

Money multiplier = 1$\div$ RR

Money multiplier = 1$\div$ 0.2

Money multipier = 5

With increase in the reserve ration the multiplier becomes "5" which is half of the previous ratio required. So, which means to fulfill the money demand the central bank needs to print more money that's why this action was restrictive