Chapter 12, Problem 1TY

To determine

To describe:To impact on the money supply if the required reserve ratio is 10%.

Answer to Problem 1TY

In order to attain a 10% reserve ratio, a deposit of 12$ million will lead to the increase in the money supply by a factor of 10 times.

Explanation of Solution

Money multiplier can be defined as a cash multiplier is one of different firmly related proportions of commercial bank cash to central bank cash under a partial hold banking framework.

Change in the money supply

In the economy it can be assumed that the banks had no excess reserves and public or firms don’t hold money in hand. A person having a 12$ million worth treasure and deposits the similar amount in a bank with a 10% of reserved ratio.

So, in order to calculate the money supply, the following equation can be employed:

M_S = D×1/m ……………….. (1)

Here,

M_S=money supply

D= deposit change value

M= required reserve ratio

So, according to the given condition the change in the money supply can be calculated as;

M_S=12000000×1/0.10

=120,000,000

Thus the deposit of 12$ million will lead to an increase in the money supply by a factor of 10, that will be 120 $ million.

Economics Concept Introduction

Introduction: In monetary economics, a cash multiplier is one of different firmly related proportions of commercial bank cash to central bank cash under a partial hold banking framework. It identifies with the most extreme measure of commercial bank cash that can be made, given a specific measure of central bank cash.