Question: Suppose that the banking system in the United States could be described by the following set of equations:
Reserve requirement ratio (rr) = 0.09
Currency in circulation (C) = $565 billion
Total Deposits (D) = $958 billion
Excess Reserves (ER) = $ 60 billion
(a) Given the above information calculate the level of the monetary base (MB) in the U.S. banking system.
(b) Given the above information what is the money multiplier in the U.S. banking system.
(c) Suppose that the monetary base increases by $100,000. Based on your answer in Part (b) by how much will the money supply change in the United States.
(d) Suppose the amount of currency in circulation increases to $600 billion (C = $600 billion) while all other variables remain constant. Calculate the new money multiplier.
(e) Give the economic intuition on why an increase in currency held in circulation would reduce the money supply in the U.S. economy.