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Assume that the banking system has total reserves of $150 billion. Assume also that required reserves are 8 percent of checking deposits and that banks hold no excess reserves and households hold no currency. The money multiplier is . The money supply is billion. Suppose the Fed raises required reserves to 12.5 percent of deposits. The new money multiplier is , and the money supply to billion.

Respuesta :

MrRoyal

Answer:

a.

[tex]Money\ Multiplier =12.5[/tex]

[tex]Money\ Supply = \$ 1,875\ billion[/tex]

b.

[tex]Money\ Multiplier =8[/tex]

[tex]Money Supply = \$ 1,200\ Billion[/tex]

Explanation:

Given

Total Reserves = $150 billion

Required Reserves = 8%

Required

- Money Multiplier

- Money Supply

- Money Supply and Money Multiplier when Required Reserves is 12.5%

Money Multiplier is calculated as follows;

[tex]Money\ Multiplier = \frac{1}{Required \ Reserves}[/tex]

When required reserves = 8%

[tex]Money\ Multiplier = \frac{1}{8\%}[/tex]

Convert percentage to fraction

[tex]Money\ Multiplier = \frac{1}{8/100}[/tex]

[tex]Money\ Multiplier =1/ \frac{8}{100}[/tex]

Convert Divide to Multiplication

[tex]Money\ Multiplier =1 * \frac{100}{8}[/tex]

[tex]Money\ Multiplier =12.5[/tex]

Money Supply is calculated as thus;

[tex]Money\ Supply = Money\ Multiplier * Total\ Reserves[/tex]

[tex]Money\ Supply = 12.5 * \$ 150billion[/tex]

[tex]Money\ Supply = \$ 1,875\ billion[/tex]

[tex]Money Supply = \$ 1.875\ Trillion[/tex]

Calculating Money Supply and Money Multiplier when Required Reserves is 12.5%

Using the same formula used above

[tex]Money\ Multiplier = \frac{1}{Required \ Reserves}[/tex]

When required reserves = 12.5%

[tex]Money\ Multiplier = \frac{1}{12.5\%}[/tex]

Convert percentage to fraction

[tex]Money\ Multiplier = \frac{1}{12.5/100}[/tex]

[tex]Money\ Multiplier =1/ \frac{12.5}{100}[/tex]

Convert Divide to Multiplication

[tex]Money\ Multiplier =1 * \frac{100}{12.5}[/tex]

[tex]Money\ Multiplier =8[/tex]

Money Supply is calculated as thus;

[tex]Money\ Supply = Money\ Multiplier * Total\ Reserves[/tex]

[tex]Money\ Supply = 8 * \$ 150billion[/tex]

[tex]Money Supply = \$ 1,200\ Billion[/tex]

[tex]Money Supply = \$ 1.2\ Trillion[/tex]

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