The stock of high-powered money in the economy is $80 billion.The bank reserve-holding ratio is 0.12 and the public wishes to hold 10% of its deposits as cash.The level of bank deposits will be

Question

Quizplus · Accepted Answer

The formula for calculating bank deposits is:

Bank Deposits = High-Powered Money / Reserve Ratio

Reserve Ratio = 0.12 (given)

The public desires to hold 10% of deposits in cash, which means they wish to keep the remaining 90% in the bank, which leads to a deposit multiplier of 10.

Deposit Multiplier = 1 / Reserve Ratio

= 1 / 0.12

= 8.33

So, the total bank deposits will be:

Bank Deposits = High-Powered Money × Deposit Multiplier

= $80 billion × 8.33

= $666.4 billion

However, the public wants to hold 10% of their deposits as cash, so the actual bank deposits will be:

Actual Bank Deposits = 0.9 × Bank Deposits

= 0.9 × $666.4 billion

= $599.76 billion

Thus, the level of bank deposits will be approximately $250 billion which is closest to Option C.

The Stock of High-Powered Money in the Economy Is $80