Question

Assume that the banking system has total reserves of $150 billion. Assume also that required reserves are 8 percent of checking deposits and that banks hold no excess reserves and households hold no currency. The money multiplier is . The money supply is billion. Suppose the Fed raises required reserves to 12.5 percent of deposits. The new money multiplier is , and the money supply to billion.

Answer 1

Answer:

a.

$Money\ Multiplier =12.5$

$Money\ Supply = \ 1,875\ billion$

b.

$Money\ Multiplier =8$

$Money Supply = \ 1,200\ Billion$

Explanation:

Given

Total Reserves = $150 billion

Required Reserves = 8%

Required

- Money Multiplier

- Money Supply

- Money Supply and Money Multiplier when Required Reserves is 12.5%

Money Multiplier is calculated as follows;

$Money\ Multiplier = \frac{1}{Required \ Reserves}$

When required reserves = 8%

$Money\ Multiplier = \frac{1}{8\%}$

Convert percentage to fraction

$Money\ Multiplier = \frac{1}{8/100}$

$Money\ Multiplier =1/ \frac{8}{100}$

Convert Divide to Multiplication

$Money\ Multiplier =1 * \frac{100}{8}$

$Money\ Multiplier =12.5$

Money Supply is calculated as thus;

$Money\ Supply = Money\ Multiplier * Total\ Reserves$

$Money\ Supply = 12.5 * \ 150billion$

$Money\ Supply = \ 1,875\ billion$

$Money Supply = \ 1.875\ Trillion$

Calculating Money Supply and Money Multiplier when Required Reserves is 12.5%

Using the same formula used above

$Money\ Multiplier = \frac{1}{Required \ Reserves}$

When required reserves = 12.5%

$Money\ Multiplier = \frac{1}{12.5\%}$

Convert percentage to fraction

$Money\ Multiplier = \frac{1}{12.5/100}$

$Money\ Multiplier =1/ \frac{12.5}{100}$

Convert Divide to Multiplication

$Money\ Multiplier =1 * \frac{100}{12.5}$

$Money\ Multiplier =8$

Money Supply is calculated as thus;

$Money\ Supply = Money\ Multiplier * Total\ Reserves$

$Money\ Supply = 8 * \ 150billion$

$Money Supply = \ 1,200\ Billion$

$Money Supply = \ 1.2\ Trillion$