How is the money multiplier related to the reserves ratio

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Reference no: EM131043521

Assume that the consolidated balance sheet for the commercial banking system can be simplified as follows: D+NW=R+L where D=deposits, NW= net worth, R=reserves and L=loans. Assume that the banks maintain a fixed reserves ratio (R/D) of 10% and a capital adequacy ratio (NW/L) of 10%. In addition, assume that the cash holdings of the non-bank public remain close to 5% remain close to 5% of deposits and that reserves total $20bn.

a) How large is the monetary base ($bn)?

b) How large is the (broad) money supply?

c) What is the value of the money multiplier?

d) How is the money multiplier related to the reserves ratio?

Reference no: EM131043521

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