If there is an economy’s monetary base is $1000 m, and the reserve-deposit ratio (rr) is 0.35. suppose people hod 1/5 of their money as currency and deposit 4/5 at banks. Then what are the currency -deposit ratio and money supply?A.0.2 2180B.0.25 2270C. 0.8 1570D.0.25 454
Question
If there is an economy’s monetary base is $1000 m, and the reserve-deposit ratio (rr) is 0.35. suppose people hod 1/5 of their money as currency and deposit 4/5 at banks. Then what are the currency -deposit ratio and money supply?A.0.2 2180B.0.25 2270C. 0.8 1570D.0.25 454
Solution 1
The currency-deposit ratio (cr) is the proportion of the total money supply held as currency, which is 1/5 or 0.2.
The money supply (MS) can be calculated using the formula:
MS = MB / (cr + rr)
Where: MB = Monetary base = $1000 m cr = Currency-deposit ratio = 0.2 rr = Reserve-deposit ratio = 0.35
Substituting the values into the formula, we get:
MS = 1000 / (0.2 + 0.35) = 1000 / 0.55 = 1818.18 m
So, the currency-deposit ratio is 0.2 and the money supply is 1818.18 m.
However, none of the options match this result. There might be a mistake in the question or the options provided.
Solution 2
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