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In economy L, households and firms want to keep a currency to deposit ratio, (=C ⁄D), of 0.20, while banks are required to keep a reserves to deposit ratio, (=R ⁄D), of 0.10. Banks in this economy keep no excess reserves. The price level stands at 1, or 100 percent, and the monetary base is $40 billion.
a) Calculate the value of the money multiplier, mm.
b) What is the money supply?
c) How much of the money supply will be held in the form of currency? In the form of bank deposits?
d) If the Reserve bank wants to increase the money supply by $20 billion, what is the required increase in the monetary base?
e) How will the Reserve bank use open market operations to increase the monetary base?
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