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In a specific economy, the central bank reports a monetary base of 8 million dollars. The currency-deposit ratio (cr) in this economy is 0.2. If the money supply in this economy is 24 million dollars, what is the reserve-deposit ratio?A.18%B.19%C.20%D.22%

Question

In a specific economy, the central bank reports a monetary base of 8 million dollars. The currency-deposit ratio (cr) in this economy is 0.2. If the money supply in this economy is 24 million dollars, what is the reserve-deposit ratio?A.18%B.19%C.20%D.22%

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Solution

The reserve-deposit ratio (rr) can be calculated using the formula for the money multiplier in the money supply model:

M = m * B

where M is the money supply, m is the money multiplier, and B is the monetary base. The money multiplier is given by the formula:

m = 1 + cr / rr + cr

Given that M = 24million,B=24 million, B = 8 million, and cr = 0.2, we can substitute these values into the formulas to solve for rr.

First, calculate the money multiplier:

m = M / B = 24million/24 million / 8 million = 3

Then, substitute m = 3 and cr = 0.2 into the formula for the money multiplier and solve for rr:

3 = 1 + 0.2 / rr + 0.2

Solving this equation gives rr = 0.2 or 20%.

Therefore, the reserve-deposit ratio is 20%, so the correct answer is C. 20%.

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