Assume that the consolidated balance sheet for the commercial banking system can be simplified as follows: D+NW=R+L where D=deposits, NW= net worth, R=reserves and L=loans. Assume that the bans maintain a fixed reserves ratio (R/D) of 10% and a capital adequacy ratio (NW/L) of 10%. In addition, assume that the cash holdings of the non-bank public remain close to 5% remain close to 5% of deposits and that reserves total $20bn.
a) how large is the monetary base ($bn)?
b)how large is the (broad) money supply?
c) what is the value of the money multiplier?
d) how is the money multiplier related to the reserves ratio?
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