Question

In the economy of Robberia, the monetary base is $2,000. People hold half of their money in the form of currency (and thus half as bank deposits). Banks hold a quarter of their deposits in reserve. What are the reserve to deposit ratio? The currency to deposit ratio? The money multiplier? The money supply?

Answer 1

a. Reserve ratio = 0.25, or 25%.

b. Currency to deposit ratio = 1, or 100%

c. Money multiplier = 4

d. Money supply = $2,000

Step-by-step explanation:

Monetary base = $2,000

Currency in circulation = $2,000 ÷ 2 = $1,000

Bank deposit = $2,000 ÷ 2 = $1,000

a. Reserve ratio: This can be calculated as reserve divided deposit. Since the bank hold a quarter of deposits in reserve, we have:

Reserve ratio = 1/4 = 0.25, or 25%

b. The currency to deposit ratio: This can be calculated as currency in circulation divided by the bank deposit. Therefore, we have:

Currency to deposit ratio = $1,000/$1,000 = 1, or 100%

c. The money multiplier: This can be calculated as 1 divided by the reserve ratio. Therefore, we have:

Money multiplier = 1/0.25 = 4

d. The money supply: This is also referred as monetary base. It is the addition of currency in circulation and demand deposit. Therefore, we have:

Money supply = $1,000 + $1,000 = $2,000