In an economy the public holds currency equal to 30 % of bank deposits (currency‑deposit ratio $c = 0.30$). Banks are required to keep a reserve ratio of 10 % ($r = 0.10$) and initially hold no excess reserves.

(a) Compute the money multiplier.
(b) If the central bank injects a net increase of $\text{₦}500$ million in reserves, what is the expected increase in the money supply?
(c) Suppose banks now decide to hold an additional excess reserve ratio of 5 % ($e = 0.05$). What is the new money multiplier and the corresponding increase in the money supply from the same $\text{₦}500$ million reserve injection?

Give all answers to two decimal places where appropriate.

Question

In an economy the public holds currency equal to 30 % of bank deposits (currency‑deposit ratio $c = 0.30$). Banks are required to keep a reserve ratio of 10 % ($r = 0.10$) and initially hold no excess reserves.

(a) Compute the money multiplier.
(b) If the central bank injects a net increase of $\text{₦}500$ million in reserves, what is the expected increase in the money supply?
(c) Suppose banks now decide to hold an additional excess reserve ratio of 5 % ($e = 0.05$). What is the new money multiplier and the corresponding increase in the money supply from the same $\text{₦}500$ million reserve injection?

Give all answers to two decimal places where appropriate.

Accepted Answer

Initial multiplier: 3.25; Increase in money supply: 1,625.00 million; New multiplier: 2.89; New increase: 1,444.44 million

Neco Model Questions Vol1 2025 Economics Question 50

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