Answer to Question #129874 in Macroeconomics for godfrey

Question

In the Namibian economy, the commercial banks have deposits of N$600 billion. Their reserves are N$60 billion. All reserves are in deposits with the Bank of Namibia and the commercial banks hold no excess reserves. There is N$120 billion in Bank of Namibia, notes outside the banks, and there are no coins.
a) What is the economy's monetary base? (5 marks)
b) What is the quantity of money in the economy?

Answer 1

a) Monetary Base( MO or MB), is the total amount of bank notes and coins.This includes the the total currency circulating in the public, plus the currency that is physically held in the vaults of commercial banks, plus the commercial bank's reserves which are held in the central bank. Therefore the Namibian economy has a monetary base of;

N$60 billion(Reserves) + N$120 billion( Currency in circulation)=N$180 billion

b) The quantity of money in the economy is referred to as Money supply(MS), This is the total stock of money (paper notes, coins and demand deposits of bank) in circulation which is held by the public at any particular point of time. This implies that the quantity of money in the Namibian economy can be obtained as;

N$600 billion(Bank Deposits) +N$120 billion( Currency in circulation) =N$270 billion.