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Intermediate Macroeconomics Heman Das Lohano Q

The document provides answers to questions about calculating money supply given different scenarios about how money is held by the public and reserve requirements by banks. (i) If all money is held as currency, money supply equals the monetary base of Rs.8000. (ii) If all money is held as deposits and banks hold 100% reserves, money supply also equals Rs.8000. (iii) If money is held as deposits and banks hold 10% reserves, the money multiplier is 10 and money supply is Rs.80000. (iv) If currency and deposits are held equally and banks hold 10% reserves, the money multiplier is 1.818 and money supply is Rs.14545. To increase money supply from Rs

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Uzair Aslam
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63 views2 pages

Intermediate Macroeconomics Heman Das Lohano Q

The document provides answers to questions about calculating money supply given different scenarios about how money is held by the public and reserve requirements by banks. (i) If all money is held as currency, money supply equals the monetary base of Rs.8000. (ii) If all money is held as deposits and banks hold 100% reserves, money supply also equals Rs.8000. (iii) If money is held as deposits and banks hold 10% reserves, the money multiplier is 10 and money supply is Rs.80000. (iv) If currency and deposits are held equally and banks hold 10% reserves, the money multiplier is 1.818 and money supply is Rs.14545. To increase money supply from Rs

Uploaded by

Uzair Aslam
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Intermediate Macroeconomics Heman Das Lohano

Q:
(a) An economy has a monetary base of Rs.8000. Calculate the money supply in scenarios (i)–
(iv).

(i) All money is held as currency.


(ii) All money is held as demand deposits. Banks hold 100 percent of deposits as reserves.
(iii) All money is held as demand deposits. Banks hold 10 percent of deposits as reserves.
(iv) People hold equal amounts of currency and demand deposits. Banks hold 10 percent of
deposits as reserves.

(b) Assume that the money supply is Rs.1000. Assume that the reserve-to-deposit ratio (rr) is 0.1
and the currency-to-deposit ratio (cr) is 0.2. How much does the central bank need to increase
the monetary base to attain a money supply equal to Rs.1050? Explain how the central bank
accomplishes this objective.

Key:
(a)
(i)
M=C+D
where
M = Money Supply
C = Currency held by public/people
D = Demand deposits in banks by public/people

M = C + D = 8000 + 0 = 8000

If all money is held as currency, then the money supply is equal to the monetary base. The money
supply will be Rs.8000.

(ii)
M = C + D = 0 + 8000 = 8000

If all money is held as deposits, but banks hold 100 percent of deposits on reserve, then there are
no loans. The money supply will be Rs.8000.

(iii)

M = Money supply
B = Monetary base
(cr+1)/cr+rr) is money multiplier

1
If all money is held as deposits and banks hold 10 percent of deposits on reserve, then the reserve-
deposit ratio (rr) is 0.10. The currency-deposit ratio (cr) is 0, and the money multiplier will be
1/0.1, or 10. The money supply will be Rs.80000.

(iv)
If people hold an equal amount of currency and deposits, then the currency deposit ratio is 1. The
reserve-deposit ratio is 0.2 and the money multiplier is (1 + 1)/(1 + 0.1) = 1.818. The money supply
will be Rs.14545

(b)

The central bank needs to increase the monetary base by Rs.12.5. The central bank will buy
government securities to inject Rs.12.5 of new reserves in the banking system.

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