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View Full Version : couse 2, nov 2000, #42

modelthry
05-13-2002, 12:51 PM
"An economy has a fractional reserve banking system. The reserve requirement, r, in this economy is less than one. People in this economy hold some money in the form of cash in their pockets and some as demand deposits at banks. Banks hold no excess reserve. Determine the final impact of an increase of B in the monetary base."

They say the answer is C, "The level of required reserves will increase, and the money supply will increase by more than B but less than B/r". Another choice is D, which is the same as C except it states that the required reserve will not change. I see no support in the SoA solution for the assertion that r will change. Can someone help me understand why r should change, and in what direction?

Gandalf
05-13-2002, 01:01 PM
r is the reserve ratio. There is no indication it will change.

Level of reserves is the amount of reserves, equal to r times something (Deposits, maybe?). Those somethings will increase, so the level of reserves increases.

modelthry
05-13-2002, 01:03 PM
r is the reserve ratio. There is no indication it will change.

Level of reserves is the amount of reserves, equal to r times something (Deposits, maybe?). Those somethings will increase, so the level of reserves increases.

Tricky tricky. Is this convention mentioned somewhere in the reading? I must have missed it. I just assumed "reserve level" meant the same thing as "reserve ratio". Whoa, nellie!