Commercial banks have a target reserve ratio of 30 percent and there is a cash drain of 20 percent. If the Central Bank issues an additional 12 dollars of currency the money supply will increase by dollars.

Commercial banks have a target reserve ratio of 30 percent and there is a cash drain of 20 percent. If the Central Bank issues an additional 12 dollars of currency the money supply will increase by dollars.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.

Question

Commercial banks have a
target reserve ratio of 30
percent and there is a cash
drain of 20 percent. If the
Central Bank issues an
additional 12 dollars of
currency the money supply will
increase by _____________ dollars.

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