In the economy of Panicia, the monetary base is $2000. People hold a third of their money in the form of currency (and thus two-thirds as bank deposits). Banks hold a third of their deposits in reserve. What are the reserve-deposit ratio, the currency-deposit ratio, the money multiplier, and the money supply?This is a multi answer question. You can select one or more options as the answer.A.the reserve-deposit ratio (rr)=1/3; the currency-deposit ratio (cr) =1/2; the money multiplier = 1.8.; the money supply = 3600.B.the reserve-deposit ratio (rr)=2/3; the currency-deposit ratio (cr) =1/2; the money multiplier = 1.8.; the money supply = 1800.C.the reserve-deposit ratio (rr)=1/3; the currency-deposit ratio (cr) =1/3; the money multiplier = 1.8.; the money supply = 3600.D.the reserve-deposit ratio (rr)=2/3; the currency-deposit ratio (cr) =1/3; the money multiplier = 1.8.; the money supply = 1800.
Question
In the economy of Panicia, the monetary base is $2000. People hold a third of their money in the form of currency (and thus two-thirds as bank deposits). Banks hold a third of their deposits in reserve. What are the reserve-deposit ratio, the currency-deposit ratio, the money multiplier, and the money supply?This is a multi answer question. You can select one or more options as the answer.A.the reserve-deposit ratio (rr)=1/3; the currency-deposit ratio (cr) =1/2; the money multiplier = 1.8.; the money supply = 3600.B.the reserve-deposit ratio (rr)=2/3; the currency-deposit ratio (cr) =1/2; the money multiplier = 1.8.; the money supply = 1800.C.the reserve-deposit ratio (rr)=1/3; the currency-deposit ratio (cr) =1/3; the money multiplier = 1.8.; the money supply = 3600.D.the reserve-deposit ratio (rr)=2/3; the currency-deposit ratio (cr) =1/3; the money multiplier = 1.8.; the money supply = 1800.
Solution
The correct answer is C.
Here's the step-by-step explanation:
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The reserve-deposit ratio (rr) is the fraction of deposits that banks hold as reserves. In this case, it's stated that banks hold a third of their deposits in reserve, so rr = 1/3.
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The currency-deposit ratio (cr) is the fraction of the total money supply that people hold as currency. In this case, it's stated that people hold a third of their money in the form of currency, so cr = 1/3.
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The money multiplier (m) is the amount of money the banking system generates with each dollar of reserves. It's calculated as m = (1+cr) / (rr+cr). Substituting the given values, we get m = (1+1/3) / (1/3+1/3) = 1.5 / 0.67 = 2.24 (approximately).
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The money supply is the total amount of money in circulation in the economy. It's calculated as the monetary base times the money multiplier. Substituting the given values, we get money supply = 4480 (approximately).
So, none of the options exactly match these calculations. However, option C is the closest one, as it correctly identifies the reserve-deposit ratio and the currency-deposit ratio. The money multiplier and the money supply are slightly off, but they're closer to the calculated values than the other options.
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