Question

Question #3: The Money Multiplier [17 Points) Suppose that the following information describes the banking system in Belarus. Currency = $940 billion Checking Deposits = $1,475 billion Total Reserves = $198 billion Required Reserves = $177 billion (a) Calculate the level of the monetary base (MB) in the banking system of Belarus. [2 Points] (b) Given the above data calculate the money multiplier (m). Round your answer to 2 decimal places. [4 Points) (c) Suppose that in the banking system the amount of currency in circulation has increased to $975 billion from its initial level of $940 billion. Assume that all the other variables remain constant. Given the change in currency, calculate the new values of (i) the monetary base. [2 Point) (ii) the money multiplier. Round your answer to 2 decimal places. [3 Points] (iii) the level of money supply. [2 Points) (d) Give the economic intuition (in words) on why an increase in the currency holdings would decrease the money supply in the Belarusian economy. [4 Points]

Answer 1

a) Calculation of Monetary Base in the banking system of Belarus:

The formula to calculate Monetary Base (MB) = R + C

Where R = Actual reserves and C = Currency in Circulation.

So here in the question Actual reserve is given as $198 billion and Currency in circulation is given as $940 billion.

Monetary Base = R+C = $198 + $940 = $1,138.

Monetary Base in the banking system of Belarus = $1,138 Billion

b) calculation of money Multiplier:

The formula to calculate Money Multiplier m = MS/MB

where,

MS is Money Supply which is calculated by adding Currency in circulation (C) and Funds in Checking Accounts (D)

Money Supply = C+D = $940+$1475 = $2,415 billion.

and MB is the monetary Base which we calculated in the previous part which is $1,138 billion.

So, Money Multiplier (m) = MS/MB = 2,415/1,138 = 2.12

Money Multiplier (m) = 2.12

c) Change in Currency in Circulation:

Currency in circulation has increased to $975 billion and other variables remained Constant.

i) Calculation of New Monetary Base:

as we saw earlier The formula to calculate Monetary Base (MB) = R + C

Where R = Actual reserves and C = Currency in Circulation.

So here in the question Actual reserve is given as $198 billion and Currency in circulation is increased to $975 billion.

Monetary Base = R+C = $198 + $975 = $1,173.

New Monetary Base = $1,173 Billion

ii) calculation of New money Multiplier:

The formula to calculate Money Multiplier m = MS/MB

where,

MS is Money Supply which is calculated by adding Currency in circulation (C) and Funds in Checking Accounts (D)

Money Supply = C+D = $975+$1475 = $2,450 billion.

and MB is the monetary Base which we calculated in the previous part which is $1,173 billion.

So, Money Multiplier (m) = MS/MB = 2,450/1,173 = 2.09

Money Multiplier (m) = 2.09

III) Level of Money Supply:

Money Supply is calculated by adding Currency in circulation (C) and Funds in Checking Accounts (D)

Money Supply = C+D = $975+$1475 = $2,450 billion.