Chapter 18

Question 0

Define excess reserve ratio (little e)

Answer 0

e = ER/DD

Question 1

Define little c

Answer 1

c = Currency/DD

Question 2

Define “rr”

Answer 2

rr = reserve requirement on DD

Question 3

Given: find c, e, MS and m
Currency = 400
DD = 800
ER = .8
rr = .1 or 10%

Answer 3

c = C/DD = 400/800 = .5
e = ER/DD = .8/800 = .001
MS = Currency + DD = 400+800=1,200
Complete Money Multiplier m = (1+c/rr+c+e) = (1+.5/.10+.5+.001) ~ 2.5

Question 4

Monetary Base (MB)

Answer 4

MB = Currency + ALL Reserves (RR and ER)

Question 5

Complete Money Multiplier

Answer 5

MS = [(1+c)/(rr+c+e)]MB

Question 6

Money Supply (MS)

Answer 6

MS = Currency + DD

Question 7

Money Multiplier (m)

Answer 7

m = (1 + c)/(rr + c + e)

Question 8

Relate MS to the MB algebraically

Answer 8

MS = (m)MB

*This is the check, to make sure MS is really equal to (m)x(MB)

Question 9

Do the money multiplier problem

Answer 9

It’s on the notes worksheet and in the Ch. 18 notes in binder.

Question 10

How can c (and therefore probably C) rise with an unchanged MB?

Answer 10

DD must fall enough that the existing monetary base is sufficient to support banks’ reserve needs.