Suppose that the required reserve ratio is equal to 10%. If the currency-to-deposit ratio is fixed at 20%, what is the money multiplier? If the monetary base is $100 million, what is the money supply?

Suppose that the required reserve ratio is equal to 10%. If the currency-to-deposit ratio is fixed at 20%, what is the money multiplier? If the monetary base is $100 million, what is the money supply?

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.

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Suppose that the required reserve ratio is equal to 10%. If the currency-to-deposit ratio is fixed at 20%, what is the money multiplier? If the monetary base is $100 million, what is the money supply?

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