Question

2. In the economy of Briskland, the commercial banks have deposits of $500 billion. Their reserves are $50 billion, 80 percent of which is in deposits with the Central Bank. There is $20 billion in Central Bank notes outside the banks, and there are no coins. b) What is the monetary base? If all the deposits are money, what is the total quantity of money? What is the banks' reserve ratio? What is the currency drain as a percentage of the quantity of deposits?

Answer 1

Question 2

(a)

Calculate the monetary base -

Monetary base = Currency in circulation + Reserves

Monetary base = $20 billion + $50 billion = $70 billion

Thus,

The monetary base is $70 billion.

(b)

Calculate the total quantity of money -

Total quantity of money = Deposits + Currency in circulation

Total quantity of money = $500 billion + $20 billion = $520 billion

Thus,

The total quantity of money is $520 billion.

(c)

Calculate the banks' reserve ratio -

Banks' reserve ratio = Reserves/Deposits

Banks' reserve ratio = $50 billion/$500 billion = 0.10 or 10%

Thus,

The banks' reserve ratio is 10%.

(d)

Calculate the currency drain ratio -

Currency drain ratio = Currency/Deposist

Currency drain ratio = $20 billion/$500 billion = 0.04 or 4%

Thus,

The currency drain as a percentage of the quantity of deposits is 4%.