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Money Supply Multipliers

The money supply is broadly defined to include all the deposits held with the chartered banks and near banks. The deposits with near banks, on average, are equal to 80% of those held with the chartered banks. Currency held by the public to satisfy their day-to-day needs is equal to 10% of total deposits held by the depository institutions. The chartered banks cash reserve ratio is 3%, and that of the near banks is 3.5%.

a. The bank of canada increases the monetary base by $50 million. Calculate the chartered banks' deposit multiplier, and the increase in chartered bank deposits.

b. Calculate the increase in the money supply.

c. Derive the money supply multiplier equation, and use it to check your answer in (b) above.

Solution Preview

The money supply is broadly defined to include all the deposits held with the chartered banks and near banks. The deposits with near banks, on average, are equal to 80% of those held with the chartered banks. Currency held by the public to satisfy their day-to-day needs is equal to 10% of total deposits held by the depository institutions. The chartered banks cash reserve ratio is 3%, and that of the near banks is 3.5%.

a. The bank of Canada increases the ...

Solution Summary

Response provides the steps to derive the money supply multiplier equation

$2.19