Answer to Question #25717 in Macroeconomics for Blair

Question

How do you find the intial money supply in an economy, given the required reserve deposit ratio is 25%, the reserves are equal to 10 billion, and 5 billion is held by the public in cash.

Answer 1

In economics, money creation is the process by which the money supply of a country or a monetary region (such as the Eurozone) is increased. A central bank may introduce new money into the economy (termed 'expansionary monetary policy') by purchasing financial assets or lending money to financial institutions. Also, in a broader sense, it could be said that commercial banks introduce new money by multiplying base money created by the central bank through fractional reserve banking; this expands the amount of broad money (i.e. cash plus demand deposits) in the economy.

Initial money supply = reserves/reserve deposit ratio + cash = 10 billion/25% + 5 billion = $45 billion