Question

In June 2014, individuals and businesses held: • $50 billion in currency • $1,000 billion in chequable deposits • $5,000 billion in non-chequable deposits • $750 billion in fixed term deposits and other deposits In June 2014, banks held: • $450 billion in currency • $100 billion in reserves at the central bank $800 billion in loans to households and businesses

question 3

Answer 1

Let’s understand the Currency Drain ratio in brief.

Currency Drain Ratio

Meaning:- The currency drain ratio is just the ratio of currency “leaked” from the banking

System (Desired Currency Holdings) to deposits held by banks.

Formula:- In Simple the formula for CDR will be;

Currency Drain Ratio= Currency/ Deposits

For an Example; Currency is $10000 and the Deposits is $ 15000

Then the calculation is like,

= Currency/ Deposits

Here, the Currency is $ 10000 and

Deposits is $15000

So if we put the values in formula then it will be like

= $10000/$15000

= 0.666667

i.e. the Currency Drain ratio is 67%.

Now let's calculate our problem, here we have Currency as $50 bilion and $450 billion

Which comes to $500 billion as the total Currency.

Now, we will calculate the Deposits which will be

= $1000 + $5000 + $750 + $100 + 800

= $7650

We will consider the componenests of all the credits to the individuals and to the bank as the debits;

So the CDR will be

= $500/$7650

= 0.0653594

= 6.5359%