If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $800 billion, and excess reserves total $0.8 billion, then the money supply is ________.

Question

Quizplus · Accepted Answer

The desired reserve ratio is 10%, which means that banks must hold 10% of their total deposits as reserves. 
Total deposits = Currency in circulation + Chequable deposits = $400 billion + $800 billion = $1200 billion. 
Reserves required = 10% of $1200 billion = $120 billion. 
Excess reserves = $0.8 billion. 
So, the total reserves held by the banking system = reserves required + excess reserves = $120 billion + $0.8 billion = $120.8 billion. 
Now, the money supply can be calculated using the money multiplier formula:

Money supply = (1/required reserve ratio) x reserves held by banking system 
= (1/0.1) x $120.8 billion 
= $1208 billion 
Therefore, the money supply is $1200 billion + $8 billion (created using the money multiplier) = $1208 billion.

If the Desired Reserve Ratio Is Ten Percent, Currency in Circulation