Q5 a Suppose the required reserve ratio is 20 currency is 50

Q5: (a) Suppose the required reserve ratio is 20%, currency is $500 billion, deposits are $900 billion, and excess reserves are $2 billion. What is the total amount of reserves in the banking system? A. $2 billion B. $180 billion C. $182 billion D. $682 billion (b) Suppose the required reserve ratio is 20%, currency is $500 billion, deposits are $900 billion, and excess reserves are $2 billion. What is the monetary base? A. $180 billion B. $682 billion C. $902 billion D. $1,400 billion (c) Suppose the required reserve ratio is 20%, currency is $500 billion, deposits are $900 billion, and excess reserves are $2 billion. What is the money supply? A. $180 billion B. $682 billion C. $902 billion D. $1,400 billion

Solution

(a) Option (C)

Total reserves ($ Billion) = Required reserves + Excess reserves

= (Deposits x Required reserves ratio) + Excess reserve = (900 x 20%) + 2 = 180 + 2 = 182

(b) Option (B)

Monetary base ($ Billion) = Currency + Total reserves = 500 + 182 = 682

(c) Option (D)

Money supply ($ Billion) = Currency + Deposits = 500 + 900 = 1,400