MACROECONOMICS
MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Chapter 13, Problem 1TY
To determine

To Describe: The quantum of money supply for the reserve ratio.

Expert Solution & Answer
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Answer to Problem 1TY

The size of money supply for reserve ratio of 10 percent , 1212 percent and 1623 percent are $600,000,000,000 , $480,000,000,000 and $359,928,014,397 respectively.

Explanation of Solution

The bank has $120 billion in cash, of which half is being held back as required reserves, which means that the required reserves is $120 billion2=$60 billion.

By using the following formula, the size of money can be calculated:

Money supply=1m×RR............. (eq: 1)

Where RR is the required reserves held by bank.

For 10 percent required reserve ratio, the size of money supply can be calculated by substituting values in equation (1):

Money supply=10.10×60,000,000,000                         = 600,000,000,000

Therefore, the size of money supply for reserve ratio of 10 percent is $600,000,000,000 .

Similarly, for 1212 percent required reserve ratio, the size of money supply can be calculated by substituting values in equation (1):

Money supply=10.125×60,000,000,000                         = 480,000,000,000

Therefore, the size of money supply for reserve ratio of 1212 percent is $480,000,000,000 .

Similarly, for 1623 percent required reserve ratio, the size of money supply can be calculated by substituting values in equation (1):

Money supply=10.1667×60,000,000,000                         = 359,928,014,397

Therefore, the size of money supply for reserve ratio of 1623 percent is $359,928,014,397 .

Economics Concept Introduction

Introduction: Reserves are assets held with bank in order to cater the requirements of transactions done daily, which includes fund withdrawals, fund transfers between banks, to clear collection checks etc.

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