In the United Kingdom, the currency drain ratio is 38...

In the United Kingdom, the currency drain ratio is 38 percent of deposits and the reserve ratio is 2 percent of deposits. In Australia, the quantity of money is $\$ 150$ billion, the currency drain ratio is 33 percent of deposits, and the reserve ratio is 8 percent of deposits. a. Calculate the U.K. money multiplier. b. Calculate the monetary base in Australia.

In the United Kingdom, the currency drain ratio is 38 percent of deposits and the reserve ratio is 2 percent of deposits. In Australia, the quantity of money is $\$ 150$ billion, the currency drain ratio is 33 percent of deposits, and the reserve ratio is 8 percent of deposits.
a. Calculate the U.K. money multiplier.
b. Calculate the monetary base in Australia.

Key Concepts

Currency Drain Ratio

The currency drain ratio indicates the proportion of money that depositors choose to hold as cash rather than depositing it back into the banking system. This impacts the money multiplier because money held as currency does not contribute to further deposit creation in the banking sector.

Monetary Base

The monetary base, also known as high-powered money, is the sum of currency in circulation and banks' reserves held at the central bank. It serves as the foundation upon which the broader money supply is built via the money multiplier process, and its level is a critical factor in a central bank’s control over the economy's liquidity.

Money Multiplier

The money multiplier is a key concept in monetary economics that expresses how an initial amount of reserves can lead to a greater final increase in the total money supply. It is determined by the inverse of the sum of the reserve ratio and the currency drain ratio, which reflects the proportion of deposits that banks hold as reserves and the proportion that the public holds in currency, respectively.

Reserve Ratio

The reserve ratio is the fraction of deposits that banks are required to hold as reserves rather than lend out. It is set by regulatory authorities and plays a crucial role in determining how much money banks can create through lending activities.

Transcript

00:02 Hello students, so today we will discuss about the computation of money multiplier.

00:09 So let's understand what is money multiplier.

00:11 So it is understood as a process of creation of money in an economy by the banks.

00:18 So banks would use the deposits of the consumer to lend it further and earn profits and this process would repeat leading to creation of money in an economy.

00:32 So if we have let's suppose, let's understand this with the help of an example, we are taking country k and the c currency train ratio is let's say 38 % of deposits.

01:10 I'm referring deposits by d .p.

01:14 And the reserve ratio is 2 % of deposits.

01:24 So how or what would be the value of money multiplier? so money multiplier is computed as 1 plus currency drain ratio plus reserve ratio plus currency drain ratio.

01:46 So let's substitute the values 1 plus 0 .38 as it is 38%.

01:58 And this is 0 .02 as this is 2%.

02:03 So it would be finally computed as 3 .45.

02:13 So this is the money multiplier for country a.

02:18 Now let's understand what do we understand by the monetary base and we will compute it for a particular country say a.

02:31 So, monetary base is treated as the addition of currency plus quantity of reserves in a country.

02:45 So let's take an hypothetical example, country a.

02:52 So we have quantity of money, let's say, dollar 150 millions.

03:04 The currency drain ratio is 33 % of deposits...