In Problem 5, the banks have no unplanned reserves. Suppose that the central bank in Nocoin in creases bank reserves by $0.5 billion.

a. Explain the change in the quantity of money and why it is not equal to the change in the monetary base.

b. Calculate the money multiplier.

Problem 5

In the economy of Nocoin, bank deposits are $300 billion. Bank reserves are $15 billion, of which two thirds are deposits with the central bank. Households and firms hold $30 billion in bank notes. There are no coins. Calculate

a. The monetary base and quantity of money.

b. The banks’ desired reserve ratio and the currency drain ratio (as percentages).