In the economy of Briskland, the commercial banks have deposits of $500 billion. Their reserves are $50 billion, 80 percent of which is in deposits with the Central Bank
There is $20 billion in Central Bank notes outside the banks, and there are no coins. a) What is the monetary base? b) If all the deposits are money, what is the total quantity of money? c) What is the banks' reserve ratio? d) What is the currency drain as a percentage of the quantity of deposits?
a) The monetary base is the sum of Central Bank notes, $20 billion, and deposits at the Central Bank. The deposits at the central bank are 80 percent of banks' reserves, so deposits at the central bank are 0.8 × $50 billion, which is $40 billion. Then the monetary base is
b) The quantity of money is Central Bank notes plus deposits, so the quantity of money is
$20 billion + $500 billion = $520 billion.
c) The banks' reserve ratio is the ratio of banks' reserve to deposits, which is $50/$500 = 0.1 or 10 percent.
d) The currency drain is Central Bank notes held outside the banks. In Briskland, the currency drain is $20 billion, so as a percentage of the quantity of money, the currency drain is
$20 billion/$500 billion = 0.04 or 4.0 percent.
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