Question

Assume that banks do not hold excess reserves and that households do not hold currency, so the only form of money is demand deposits. to simplify the analysis, suppose the banking system has total reserves of $300. determine the money multiplier and the money supply for each reserve requirement listed in the following table.

Answer 1

Reserve Requirement 

A. 10% MM: 1/0.1 =10, (100/10) X 600 bn = 6000 bn (total deposit)
money supply = 10 X 6000 bn =60 000 bn 

B. 20% MM: 1/0.2 =5, (100/20) X 600 bn = 3000 bn(total deposit); 
money supply = 5 X 3000 bn =15 000 bn 

Answer 2

Answer:

A) If the reserve requirement is 10%:

• money multiplier = 1 / 10% = 10
• money supply = money multiplier x total reserves = 10 x $300 = $3,000

B) If the reserve requirement is 20%:

• money multiplier = 1 / 20% = 5
• money supply = money multiplier x total reserves = 5 x $300 = $1,500