Question

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 

Answer 1

Solution

a) Money Multiplier

Money Multiplier, Mm $=\frac{1}{reserve. ratio}$

Mm= $=\frac{1}{0.1}= 10$

b) Money Supply

Money supply = $\frac{currency\space ratio +1}{ currency \space ratio + reserve\space ratio}\times M. Base$

$\frac{0.6 +1}{ 0.6 + 0.1}\times 500 = 1,142.857 \space Billion$