In the economy of Ozlandia, the monetary base is $500 billion. People hold 20% of their money in the form of currency and the remainder in bank deposits. Banks keep 25% of their deposits in reserve. Assume the velocity of money is constant.Based on the above information, answer the following questions.a. The currency-deposit ratio (cr) is . (Note: Round your answer to two decimal places.)b. The money multiplier (m) is . (Note: Round your answer to two decimal places.)
Question
In the economy of Ozlandia, the monetary base is $500 billion. People hold 20% of their money in the form of currency and the remainder in bank deposits. Banks keep 25% of their deposits in reserve. Assume the velocity of money is constant.Based on the above information, answer the following questions.a. The currency-deposit ratio (cr) is . (Note: Round your answer to two decimal places.)b. The money multiplier (m) is . (Note: Round your answer to two decimal places.)
Solution
a. The currency-deposit ratio (cr) is calculated as the proportion of money held in the form of currency to the money held in bank deposits. In this case, people hold 20% of their money in the form of currency and the remainder (80%) in bank deposits. Therefore, the currency-deposit ratio is 0.20 / 0.80 = 0.25.
b. The money multiplier (m) is calculated as the inverse of the reserve ratio. In this case, banks keep 25% of their deposits in reserve, so the reserve ratio is 0.25. Therefore, the money multiplier is 1 / 0.25 = 4.00.
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