2. In the economy of Brightland, the commercial banks have deposits of $600 bill
ID: 2575399 • Letter: 2
Question
2. In the economy of Brightland, the commercial banks have deposits of $600 billion. Their reserves are $60 billion. All reserves are in deposits with the Central Bank and the commercial banks hold no excess reserves. There is $120 billion in Central Bank notes outside the banks, and there are no coins. A. What is the economy's monetary base? B. What is the quantity of money (Ms) in the economy? C. Calculate the money multiplier. D. Suppose the all banks are "loaned up - no required reserve", what is the new Ms? Under the assumption of "all banks are loaned up", central bank would like to decrease the Ms to S1020 by adjusting the required reserve ratio. What is the new required reserve ratio? E.Explanation / Answer
A .Economy of monetary base is sum total of amount of money circulating in public and the the amount of of reserve deposit in centeral bank
=120+60 = $180 billion
B. quantity of money in the economy is sum total of amount of money in banks + amount of money circulating in public = 600 + 120 = $720
C money multiplier = 1/reserve ratio , it shows the amount of money that banks can generate from each dollar
reserve ratio = reserve/ deposit = 60 / 600 = 0.10
money multiplier = 1/0.10 = 10 times
D.if there is no required ratio and the banks are loaned up i.e the have utillised the full capacity / deposit , the new Ms = 120+600+60 = $780
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