If money supply is M = 1,200, bank deposits are D = 800, and the monetary base (high-powered money) is H = 480,

Question

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The reserve-deposit ratio is determined by dividing the monetary base (high-powered money) by bank deposits.

Reserve-deposit ratio = H/D = 480/800 = 0.6 = 60%

However, the required reserve ratio is usually lower than the actual reserve ratio due to excess reserves, which are the reserves held by banks in excess of the required reserves.

Given that the reserve-deposit ratio is 10%, the required reserve ratio is 10% of bank deposits or 0.1D = 0.1(800) = 80.

The money multiplier is determined by dividing bank deposits by the required reserves.

Money multiplier = D/RR = D/(0.1D) = 10

Therefore, the money multiplier is 10 or 2.5 if we assume a reserve-deposit ratio of 40%, which is not the case here.

If Money Supply Is M = 1,200, Bank Deposits Are