Answer to Question #240696 in Finance for Herb

Question

1. The ABC bank has a deposit base on which it holds excess reserves of $42 Million at a reserve rate which relates to a money multiplier (MM) of 5. On January 2, 2010 Mwen-Mwen, a customer of ABC bank issued a $20 Million check drawn on its account, to Bushrod Manufacturing Company (BMC), which it deposited into its account with Satiah Bank.

 

Answer 1

Solution:

a.). The reserve ratio:

Money Multiplier = $\frac{1}{Reserve\; Ratio}$

5 = $\frac{1}{R\; R}$

Reserve ratio = $\frac{1}{5} = 20\%$

Reserve ratio = 20%

 

b.). The initial deposit base prior to the $20 Million transactions:

Change in money supply = Initial Excess Reserves $\times$ Money Multiplier = 42M x 5 = 210M

The initial deposit base prior to the $20 Million transactions = 210M