Suppose the following conditions currently exist in the economy.
- Demand deposits and other checkable deposits equal $2,000 billion.
- Currency held by the public equals $500 billion.
- The Federal Reserve requires that 3% of deposits below $50 million must be held as reserves while the reserve requirement on deposits above $50 million is 10%. Initially $600 billion is subject to the 3% reserve requirement while the remaining $1,400 billion is subject to the 10% reserve requirement.
- Total reserves equal $250 billion.
(a) Calculate the initial values of the variables listed in the first column and fill in column B.
(b) Suppose the public increases its currency holding from $500 billion to $600 billion by withdrawing an additional $100 billion from their demand deposit accounts. Assume that the withdrawals reduce demand deposits subject to the 3% reserve requirement by $40 billion and that deposits subject to the 10% reserve requirement decrease by $60 billion. Calculate the effects of this change on the variables in the first column and place those values in their appropriate places in column C.
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Variable of Interest
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Column B
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Column C
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currency ratio (C/D)
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total reserves (R)
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required reserves (RR)
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excess reserves (ER)
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required reserve ratio (rd)
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excess reserve ratio (ER/D)
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money multiplier (mm)
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monetary base (MB)
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money supply (M1)
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