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
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
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. Given that people hold 20% of their money in the form of currency and the remainder (80%) in bank deposits, the currency-deposit ratio is 0.20 / 0.80 = 0.25.
b. The money multiplier (m) is calculated using the formula m = 1 + cr / rr, where cr is the currency-deposit ratio and rr is the reserve ratio. Given that the currency-deposit ratio is 0.25 and banks keep 25% (or 0.25) of their deposits in reserve, the money multiplier is 1 + 0.25 / 0.25 = 1 + 1 = 2.
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