Question

(a)(i) Suppose the desired reserve ratio is 10% and there is no currency drain. Calculate the change in money supply resulted from a S400 increase in the monetary based in the bank system. Show your calculation. (İİ) Suppose the desired reserve ratio is 10 percent. Peter deposits $1,000 in Bank A. Bank A keeps its minimum desired reserves and lends the excess to John. John spends his loan at Company A. Company A deposits the money it receives from John in Bank B. Bank B keeps its minimum desired reserves and lends the excess to Mary. Calculate the amount that Bank B lends to Mary. Show your calculation. (iii) When Peter deposits $100 in currency in his checkable deposit at ABC Bank, how would that affect quantity of M1? Provide brief explanation to your answer.

Answer 1

Ans

1 Here money multiplier =1/10%=10

Sp money supply increases by 400(10)=4000

2 it =1000-10% of 1000 kept by A as reserves-10% of (1000-10% of 1000)=900-90=810

3 It would increase by multiple of 100 since in a fractional reserve system banks keep some fraction of deposits with them and lend rest to others