a) If Central Bank requires a reserve ratio of 5%, we first need to calculate the required the first required reserves. This is calculated as follows:
Required Reserves = Deposit x Reserve Ratio
First lets convert the reserve ratio from percentage to decimal form as follows:
Required Reserves =
Now we know the value of the required reserves, we can now determine the excess reserves:
Excess Reserves = Total reserves - Required reserves
Excess Reserves =
b) In order to determine the money supply increase, we first need to determine the multiplier.
Multiplier = 1/(reserved ratio)
Multiplier =
Money supply increase = Excess reserves x Reserved ratio
Money supply increase =
SUMMARY:
a) Excess Resevers = $75 000
b) Money Supply Increased by $1 500 00
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