EBK ECONOMICS OF MONEY, BANKING AND FIN
EBK ECONOMICS OF MONEY, BANKING AND FIN
5th Edition
ISBN: 8220106799727
Author: Mishkin
Publisher: PEARSON
Question
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Chapter 17, Problem 25AP
To determine

a. The money supply, the currency deposit ratio, the excess reserve ratio, money multiplier.

b. Effect of the above said ratios on money supply.

c. To the effect on excess reserves, the excess reserve ratio, the money supply and the money multiplier.

d. Co-relate the scenario of low lending with that of amounts got from excess reserves, the excess reserve ratio, the money supply and the money multiplier.

Concept introduction:

Money supply: This is supposed to be the deposited amount from the customer.

Money multiplier: This depicts the number of times the total money is supplied or deposited into the commercial bank. Whenever there is a deposit, the number of times of money supply increases.

Expert Solution & Answer
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Explanation of Solution

a. The calculation of money supply is as follows:

  Money supply=Currency deposits+Money in circulation

  =900+600=$1500

Therefore, the money supply is $1500.

Calculation of Currency deposit ratio:

  Currency Deposit Ratio=Currency in circulationCheckable Deposits

  =600900=0.667

Therefore, the currency deposit ratio is 0.667.

Calculation of Excess reserve ratio:

  Excess reserve ratio=Excess reservesCheckable deposits

  =15900=0.1667

Therefore, the excess reserve ratio is 0.1667.

Calculation of money multiplier:

  Monetary base=Currency in circulation+Excess reserves

  =1500(600+15)=2.43

Therefore, the money multiplier is 2.43.

b. From the given example, it is clear that the new money injected through $1400 billion is put in checkable deposits as central bank pay by checks to banks issuing bonds. This results in an increase in money supply by $1400 billion.

Now, the new money supply =1500+1400=2900 $ billions

The effect on the money supply can be concluded by stating that there is an increase in the money supply as the new money supply is $2900 billion.

c. To calculate the excess reserve ratio, we need to calculate excess reserve:

  Excess reserve=$1400+15=$1415

  Excess reserve ratio=Excess reservesCheckable deposits

  =1415900=$1.572

  Money supply=Currency deposits+Money in circulation

  =900+600=$1500

Therefore, the money supply is $1500.

Now we need to calculate the money multiplier:

  Money multipler=Currency in circulation+Checkable depositsCurrency in circulation+Excess reserves

  =600+900600+1415=0.744

d. From the above calculation, it is clear that money multiplier reduced to 0.744 which is below 1 when bonds were purchased by the Fed. The same thing happened after 2008 also. So, the money multiplier has become less than 1.

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