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Given the following data, answer four questions about the money supply and the money multiplier
Given the following data, answer four questions about the money supply and the money multiplier.
Total reserves $36 billion Transactions deposits $600 billion Cash held by public $300 billion Bonds held by public $400 billion Stocks held by public $140 billion Gross domestic product $8 biillion Interest rate 6% Required reserve ratio 0.05
a. How large is money supply (M1)?
b. How much excess reserves are there?
c. What is the money multiplier?
d. What is the available lending capacity for the banking system?
Expert Solution
a). Computation of the money supply (M1):-
M1 = Cash held by public + Transaction deposits
= $300 + $600
= $900 billion
b). Computation of the excess reserve:-
Required reserve = Deposit * Required reserve ratio
= $600 * 0.05
= $30 billion
Excess reserve = Total reserves - Required reserve
= $36 - $30
= $6 billion
c). Computation of the money multiplier:-
Money multiplier = 1 / Required reserve ratio
= 1 / 0.05
= 20
d). Computation of the available lending capacity for banking system:-
Available lending capacity = Excess reserve * Money multiplier
= $6 * 20
= $120 billion
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