Suppose that:

r = required reserve ratio = 0.15

c = {C/D} = currency ratio = 0.45

e = {ER/D} = excess reserve ratio = 0.05

MB = the monetary base = $3,000 billion

Given that the formula for the money multiplier is (1 + c) / (r + e + c) , find the value for M , the money supply.

0.223

Explanation:

The values given are:

r = required reserve ratio = 0.15

c = {C/D} = currency ratio = 0.45

e = {ER/D} = excess reserve ratio = 0.05

MB = the monetary base = $3,000 billion

Therefore, money multiplier is:

(1 + c) / (r + e + c)

= (1 + 0.45) / (0.15 + 0.05 + 0.45)

= (1.45) / (0.65)

= 2.23

money multiplier=2.23

Money supply = change in reserves * money multiplier

change in reserve=0.15-0.05

=0.1

money multiplier=2.23

Money supply = 0.1 * 2.23

= 0.223

Thus, the money supply is 0.223.