ECON 1002
TUTORIAL SHEET 4
QUESTION 2 (SOLUTIONS)
In Zambazia, the public’s cash-to-deposit ratio is 0.25 and the banks keep 15% of deposits
as cash reserves. If the total amount of cash in Zambazia is $3 billion, determine,
a. The level of deposits in the banking system
b. The money supply in Zambazia.
H (high-powered money) = total cash in the economy = 3 billion
b = the public’s cash-to-deposit ratio = 0.25
x = banks’ reserve-to-deposit ratio = 0.15
Part (a)
D = Bank deposits
𝐷 = 𝐻
𝑏 + 𝑥 =3
0.25+0.15 =3
0.4 = 7.5
Part (b)
M = money supply
𝑀 = (𝑏 + 1
𝑏 + 𝑥)𝐻 = ( 0.25+1
0.25+0.15) ×3 = (1.25
0.4 ) ×3 = (3.125)× 3 = 9.375