Question

In June​ 2018, individuals and businesses​ held: ​bullet ​$50 billion in currency and no​ traveler's checks ​bullet ​$1,000 billion in checkable deposits bullet ​$5,000 billion in savings deposits bullet ​$500 billion in time deposits ​bullet ​$250 billion in money market funds and other In June​ 2018, banks​ held: ​bullet ​$450 billion in currency bullet ​$100 billion in reserves at the central bank ​ bullet ​$800 billion in loans to households and businesses.Using the information mentioned above, answer the following questions. Calculate the M1 and M2 measures of money. Calculate the monetary based. What are the currency drain ratio and the banks’ reserve ratio? What are the M1 and M2 money multipliers? How is the money multiplier influenced by the banks’ reserve ration?

Answer 1

Solution and Explanation:

`x=450 / 1000=0.45` and
`\mathrm{C} / \mathrm{D}=50 / 1000=0.05`

`\mathrm{m} 1=1+(\mathrm{C} / \mathrm{D}) /[\mathrm{rr}+(\mathrm{ER} / \mathrm{D})+(\mathrm{C} / \mathrm{D})]`
`=(1+0.05\} /(0.45+0.05)=2.1`

`\mathrm{m} 2=1+(\mathrm{C} / \mathrm{D})+(\mathrm{T} / \mathrm{D})+(\mathrm{MMF} / \mathrm{D}) /[\mathrm{rr}+(\mathrm{ER} / \mathrm{D})+(\mathrm{C} / \mathrm{D})]`

`=(\{1+0.05+0.5+0.25\} / 0.45+0.05)=3.6`

The higher the reserve ratio the lower the money multiplier.