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Unformatted text preview: inverse of reserves requirement so that m = 1/r) However, since we assume that no currency held by depositors, money supply is equal to deposits (M = D) and monetary base is equal to reserves (MB = R). And we can calculate required reserves as: RR = r * D Which is equivalent to: R = r * D or MB = r * D And then we have: D = (1/r) * MB or M = (1/r) * MB Since r < 1 and 1/r > 1, an increase in MB that flows into deposits gets multiplied. Therefore, m = 1/r Lets put this into an example, if required reserves ratio (r) is 10%, the money multiplier (m) can be calculated as: m = 1/0.1 = 10. Therefore if the monetary base is, for example$100, then the deposits will be: $100*10 = $1000....
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This note was uploaded on 09/19/2011 for the course FINS 3650 taught by Professor Arnold during the Three '11 term at University of New South Wales.
- Three '11