Question

5. Use the information below to answer question 5:

Answer 1

Answer:

a. 200

b.900

c. 10

Explanation:

a) Excess reserves = total reserves – required reserves

                                     = 400 (given) – (deposits* required reserve ratio of which is usually 10%, so we assume it is 10%)

                                     = 400 – (2000* 10%)

                                     = 400-200

Excess reserves          = $200

b) Monetary base   = total reserves + currency  

                                   = 400 + 500 (given)

Monetary Base (B)     = $900  

c) The money multiplier is calculated as 1 divided by the required reserve ratio

Money multiplier = 1 / 10%

                             = 10

Answer 2

Answer:

(a) Excess reserves = 200

(b) Monetary base (B) = 900

(c) Money multiplier = 10

Explanation:

Assuming that the required reserve ratio (missing in the question) is 0.1:

(a) Excess reserves = Reserves - Required reserves

Reserves = 400

Required reserves = Deposits x Required reserve ratio

                               = 2000 x 0.1

                               = 200

Hence, Excess reserves = 400 - 200

                                        = 200

(b) Monetary base (B) = Reserves + Currency

                                    = 400 + 500

                                    = 900

(c) Money multiplier = 1 / Required reserve ratio

                                 = 1 / 0.1

                                 = 10