Question

The desired reserve ratio is 10 percent of deposits, and the currency drain ratio is 1 percent of deposits.
The central bank makes an open market purchase of $5 million of securities.
Calculate the change in the quantity of money and how much of the new money is currency and how much is bank deposits.

The quantity of money changes by $___ million.

Answer 1

Answer:

Quantity of money changes by $50,000,000

Explanation:

Desired reserve ratio = 10% = 0.1

Currency drain ratio = 1% = 0.01

Money multiplier = (1+0.1) / (0.1+0.01) = 1.1/ 0.11 = 10

Value of securities purchased = $5 million

Change in quantity of money :

$5 million * 10 = $50 million

Currency created : currency drain ratio * change in quantity of money

0.01 * $50,000,000 = $500,000

Amount of bank deposit = quantity change - currency created

= $50,000,000 - $500,000 = $4,500,000