Use the notations of M as money supply, H as high-powered money, D as the deposits, rr as the desired reserve-deposit ratio and cr as the cash-deposit ratio. Select the false identity from the following identities:

Question

Quizplus · Accepted Answer

The correct identities for money supply and high-powered money in terms of deposits, cash-deposit ratio, and reserve-deposit ratio are given by A) M = (1 + cr)D, B) H = (cr + rr)D, and C) (M/H) = (1 + cr)/(cr + rr). These reflect how the money supply and high-powered money are related to the amount of deposits and the ratios of cash to deposits and reserves to deposits. Option D) M = (1 + cr)(cr + rr)H is false because it incorrectly combines the multipliers for money supply and high-powered money, leading to an inaccurate representation of how money supply is calculated from high-powered money. The correct relationship between M and H considering the multipliers for cr and rr is not simply a product of (1 + cr) and (cr + rr) times H.

Use the Notations of M as Money Supply, H as High-Powered