Question

Assume that the banking system has total reserves of $150 billion. Assume also that required reserves are 8 percent of checking deposits and that banks hold no excess reserves and households hold no currency. The money multiplier is . The money supply is billion. Suppose the Fed raises required reserves to 12.5 percent of deposits. The new money multiplier is , and the money supply to billion.

Answer 1

a.

`Money\ Multiplier =12.5`

`Money\ Supply = \$ 1,875\ billion`

b.

`Money\ Multiplier =8`

`Money Supply = \$ 1,200\ Billion`

Step-by-step explanation:

Given

Total Reserves = $150 billion

Required Reserves = 8%

Required

- Money Multiplier

- Money Supply

- Money Supply and Money Multiplier when Required Reserves is 12.5%

Money Multiplier is calculated as follows;

`Money\ Multiplier = (1)/(Required \ Reserves)`

When required reserves = 8%

`Money\ Multiplier = (1)/(8\%)`

Convert percentage to fraction

`Money\ Multiplier = (1)/(8/100)`

`Money\ Multiplier =1/ (8)/(100)`

Convert Divide to Multiplication

`Money\ Multiplier =1 * (100)/(8)`

`Money\ Multiplier =12.5`

Money Supply is calculated as thus;

`Money\ Supply = Money\ Multiplier * Total\ Reserves`

`Money\ Supply = 12.5 * \$ 150billion`

`Money\ Supply = \$ 1,875\ billion`

`Money Supply = \$ 1.875\ Trillion`

Calculating Money Supply and Money Multiplier when Required Reserves is 12.5%

Using the same formula used above

`Money\ Multiplier = (1)/(Required \ Reserves)`

When required reserves = 12.5%

`Money\ Multiplier = (1)/(12.5\%)`

Convert percentage to fraction

`Money\ Multiplier = (1)/(12.5/100)`

`Money\ Multiplier =1/ (12.5)/(100)`

Convert Divide to Multiplication

`Money\ Multiplier =1 * (100)/(12.5)`

`Money\ Multiplier =8`

Money Supply is calculated as thus;

`Money\ Supply = Money\ Multiplier * Total\ Reserves`

`Money\ Supply = 8 * \$ 150billion`

`Money Supply = \$ 1,200\ Billion`

`Money Supply = \$ 1.2\ Trillion`