Answer to Question #193742 in Macroeconomics for Bernhard Weninger

Question

Given the amount of money being printed the amount of Base Currency sitting as Reserves on bank balance sheets far exceeds currency in circulation when normally the reserves only slightly exceed currency in circulation in a fractional reserve system. How can one derive the cumulative inflation effect of these excess reserves via k assuming the economy being in equilibrium with the current amount of currency in circulation? These excess reserves are a liquidity trap waiting to happen in the form of massive inflation, if (post Covid supply chain problems Dir to shifting demand or reduced production capacities etc?) amd when they make their way into the economy. The k factor ought to be able to approximate what the cumulative inflation effect might be. How can that be calculated via the Cambridge k?

Answer 1

K is the money supply reserve multiplier

RRR denotes reserve requirement ratio.

MPC denotes marginal propensity to consume.

Cumulative inflation will be the inflation reserve multiplier given by

$\frac{1}{RRR}$

After massive inflation the multiplier k can be calculated as

$\frac{1}{1-MPC}$