Question

Assume that the reserve-deposit ratio is 0.2. The Federal Reserve carries out open-market operations, purchasing $1,000,000 worth of bonds from banks. This action increased the money supply by $2,600,000. What is the currency-deposit ratio

Answer 1

Step-by-step explanation:

Money multiplier (MM) = Increase in money supply / Purchase of bonds

Money multiplier (MM) = $2,600,000 / $1,000,000

Money multiplier (MM) = 2.6

Reserve deposit ratio (RR) = 0.2

If currency deposit ratio be CR, then,

MM = (1 + CR) / (CR + RR)

2.6 = (1 + CR) / (CR + 0.2)

2.6CR + 0.52 = 1 + CR

1.6CR = 0.48

CR = 0.3

So, the currency-deposit ratio is 0.3