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Required reserve-deposit ratio for demand deposit

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Reference no: EM131250981

Suppose M2 is defined as follows: M2 = C + D + T 

where C = currency in circulation D = demand deposit 

T = saving and time deposits

Suppose the required reserve-deposit ratio for demand deposit (rd) is greater than that of saving and time deposits (rt). Let k be the cash to total deposits ratio; t be ratio of saving and time deposits to total deposits; and e be the excess reserve to total deposits ratio. Derive the money multiplier for M2 in terms of k, rd, rt, t and e. What happen to the multiplier and money supply if 

  1. innovations in the payment systems has reduced the public's optimal cash to total deposits ratio; 
  2. asset inflation has induced the banks to run down excess reserves, but a subsequent outbreak of a financial crisis force or induce (i) the banks to hold more excess reserves; and (ii) the publics to hold more cash; 
  3. a removal of a cartel in saving and time deposit rates determination (similar to the case in Hong Kong) so that saving and time deposit rates rise with increased competition while demand-deposit rate remains under the control of the cartel.

Reference no: EM131250981

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