I’m working on a economics multi-part question and need an explanation and answer to help me learn.
Suppose that the required reserve ratio is 12%, excess reserve is $300 billion, excess reserve ratio is 0.2 and currency in circulation is $1200 billion.
(a) Calculate the excess reserve ratio, the money supply, and the money multiplier.
checkable deposits = 300/0.2 = $1500
Money supply = $1200 billion + $1500 billion=$2700 billion
Excess reserve ratio = $300 billion/$1500 billion = 0.2
Money multiplier = 1/0.2 = 5
Suppose the Central Bank acts as a lender of last resort and lends $1500 billion to two failing commercial banks. Use this information to answer subquestions (b) to (c).
(b) Assuming the ratios you calculated in part (a) remain the same, predict the change of the money supply, and the resulting money supply in the market after the lending.
(c) Suppose now that instead of lending out the money and keeping the ratios constant, the commercial banks instead kept the extra borrowings from the Central Bank as excess reserve instead. Assume that currency and deposits remain the same (while excess reserve and excess reserve ratio change), calculate the new monetary base, money supply, and money multiplier.
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