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Suppose the banks in an economy have a reserve-deposit ratio of 10 percent and the currency...

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Economics

Suppose the banks in an economy have a reserve-deposit ratio of10 percent and the currency deposit ratio is 20 percent.

a. If the Central Bank increases the monetary base by $400million through open market operations, what will be the increasein the money supply?

b. If the Central Bank decreases the discount rate and firmsreact by decreasing the reserve deposit ratio to 5 percent, what isthe change in the multiplier? Will this change increase or decreasethe money supply?

c. There is a rumour circulating that bank accounts are beinghacked so many persons withdraw their deposits from the bank. Whatimpact does this have on the money multiplier, high-powered money,and the money supply?

Answer & Explanation Solved by verified expert
4.1 Ratings (753 Votes)
a initial investement I is 400 million legal reserve ratio reserve deposit ratio currency depositratioLRR1020 30increase in money supply initial investment 400 133333 million money supply will increase by 133333 millionbmoney multiplier k k 20 timesmoney    See Answer
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