If the desired reserve ratio is ten percent, currency in circulation is $400 billion, chequable deposits are $1000 billion, and excess reserves total $1 billion, then the money supply is ________.

Question

Quizplus · Accepted Answer

To calculate the money supply, we need to use the formula: Money supply = currency in circulation + chequable deposits.

We can first calculate the total reserves as: 
Total reserves = desired reserve ratio * chequable deposits 
= 0.1 * $1000 billion 
= $100 billion

The actual reserves would be the sum of excess reserves and required reserves: 
Actual reserves = excess reserves + required reserves 
Since excess reserves are $1 billion, required reserves would be: 
Required reserves = total reserves - excess reserves 
= $100 billion - $1 billion 
= $99 billion

Using the money multiplier formula, we can solve for the money supply: 
Money multiplier = 1 / reserve ratio 
= 1 / 0.1 
= 10

Money supply = money multiplier * actual reserves 
= 10 * $99 billion 
= $990 billion

Finally, we add the currency in circulation to get the total money supply: 
Money supply = currency in circulation + chequable deposits 
= $400 billion + $990 billion 
= $1400 billion

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