What are the reserve-deposit ratio

Reference no: EM132207706

Question: In the nation of Dorne, the monetary base is $1,000,000. Suppose that the people of Dorne hold 1/4 of their money in the form of currency and 3/4 in bank deposits. Banks hold 20% of their deposits in reserve. Answer each of the following parts. Show your work.

a. What are the reserve-deposit ratio, the currency-deposit ratio, the money multiplier, and the money supply for Dorne?

b. One day, fear about the banking system strikes the population, and people now want to hold 1/3 their money in the form of currency. If the Iron Bank (Dorne's central bank) does nothing, what is the new money supply?

c. If, in the face of the panic in part b, the government of Dorne decides to introduce deposit insurance. This insurance protects deposits in the event of a bank failure (i.e., the government will reimburse the depositors, if the bank fails). What response, if any, would you anticipate from households? Explain.

Reference no: EM132207706

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