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Function of high- powered money h

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Reference no: EM131270432

The total money supply M has two components: bank deposits D and cash holdings C, which we assume to bear a constant ration CD=c, 0<c<1. The high-powered money H is defined as the sum of cash holdings held by the public and the reserves held by the banks. Bank reserves are fraction of bank deposits,determined by the reserve ratio r, 0<r<1.

a) Express the money supply M as a function of high- powered money H.

b) Would an increase in the reserve ratio or lower the money supply?

c) How would an increase in the cash-deposit ratio c affect the money supply?

Reference no: EM131270432

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