Suppose that the monetary base is $ 500 billion, the reserve deposit ratio is 0.1 and the currency-deposit ratio is 0.6. Calculate: i. Money Multiplier (2 Marks) ii. Money Supply
Solution
a) Money Multiplier
Money Multiplier, Mm "=\\frac{1}{reserve. ratio}"
Mm= "=\\frac{1}{0.1}= 10"
b) Money Supply
Money supply = "\\frac{currency\\space ratio +1}{ currency \\space ratio + reserve\\space ratio}\\times M. Base"
"\\frac{0.6 +1}{ 0.6 + 0.1}\\times 500 = 1,142.857 \\space Billion"
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