Question

Assume that the public in the small country of Sylvania does not hold any cash. Commercial​ banks, however, hold 10 percent of their checking deposits as excess​ reserves, regardless of the interest rate. In the questions that​ follow, the​ "money multiplier" is given by 1 / (RR + ER ).
Where

RR ​= the percentage of deposits that banks are required to keep as reserves
ER ​= the percentage of deposits that banks voluntarily hold as excess reserves

Consider the balance sheet of one of several identical​ banks:

Assets Liabilities and Net Worth
Reserves 400 Checking Deposits 2,000
Loans 1,600 Net Worth 0
Total Assets 2,000 Liabilities and Net Worth 2,000

The required reserve ratio in this economy is _________​%. ​(Enter your response as an integer​.)
If the total money stock (supply) is $600,000, the total amount of reserves held in the banking system is_____ $

Answer 1

Answer and Explanation:

The computation is shown below:

(1) The required reserve ratio is

= Required reserves ÷ Checkable deposit

where,

Required reserves

= Total reserves - Excess reserves

= 400 - 2,000 × 10%

= $400 - $200

= $200

And, the checkable deposit is $2,000

So, the required reserve ratio is

= $200 ÷ $2,000

= 10%

(2) Now the total amount of reserves is

But before that first we have to determine the money multiplier is

Money multiplier (MM) = 1  ÷ (ER + RR)

= 1  ÷ (0.10 + 0.10)

= 1 ÷ 0.20

= 5

Now

Monetary base (MB) is

= Money stock  ÷ Money multiplier

= $600,000 ÷ 5

= $120,000

And as we know that

Monetary base = Currency + Reserves, and Currency (i.e held by public) = 0

So,

Reserves = Monetary base = $120,000