Howard CollegeECON 101

In the nation of Wiknam, people hold $1,000 of currency and $4,000 of demand deposits in the only bank, Wikbank. The reserve-deposit ratio is 0.25.

 

Using the equations we covered earlier, calculate the following:

1. The money supply (M).
2. The monetary base (B).
3. The money multiplier (m).

 

Answer:

Using the equations we covered earlier, calculate the following:

1. The money supply (M).

Money Supply = C + D

Money supply = $1,000 + $4,000

Money Supply = $5,000.

Step-by-step explanation

In the nation of Wiknam, people hold $1,000 of currency and $4,000 of demand deposits in the only bank, Wikbank. The reserve-deposit ratio is 0.25.

Using the equations we covered earlier, calculate the following:

1. The money supply (M).

Money Supply = C + D

Money supply = $1,000 + $4,000

Money Supply = $5,000.

2.The monetary base (B).

M = m x B

M= 4 * $5,000

M=$20,000

3.The money multiplier (m).

Required reserve ratio/100 = reserve-deposit ratio

Required reserve ratio/100 = 0.25

Required reserve ratio=25%

The money multiplier (m) = 1/Required reserve ratio

The money multiplier (m) = 1/25% = 4.