Macroeconomic Variables and Their Implications

Running head: MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS
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Author Note

MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS1
Table of Contents
Answer to question 2:.................................................................................................................2
Part a:.....................................................................................................................................2
Part b:.....................................................................................................................................3
Answer to question 3:.................................................................................................................5
Part a:.....................................................................................................................................5
Part b:.....................................................................................................................................6
Part c:.....................................................................................................................................7
References................................................................................................................................10

MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS2
Answer to question 2:
Part a:
Table 1: Result for simple money multiplier
Particulars Details
Reserve Ratio A 5%
Simple Money Multiplier B=1/A 20
Source: Created by Author
The simple money multiplier is measured by 1/RR (Coghlan 2014). RR denotes
reserve ratio. Here, RR is given as 5%, therefore, the result is 20.
Table 2: Results representing an increase in money supply in the banking system
Particulars Details
Deposits of Customer A $ 9,500.00
Money Multiplier B 20
Money Supply C=A*B $ 190,000.00
Increase in Money Supply D=A+C $ 199,500.00
Source: Created by Author
It is given that customer deposit is $9500 with the previously calculated money
multiplier 20. The money supply is calculated by multiplying the multiplier with the deposit
available in the bank. Therefore, the money supply is $190000 and thus the increase in the
money supply is $199500 in the banking system.

MACROECONOMIC VARIABLES AND THEIR IMPLICATIONS3
Table 3: Calculation depicting the effects of an increase in reserve ration on the money
supply in the banking system
Particulars Details
Reserve Ratio A 12.50%
Deposits of Customer B $ 9,500.00
Money Multiplier C=1/A 8
Money Supply D=B*C $ 76,000.00
Increase in Money Supply E=B+D $ 85,500.00
Source: Created by Author
Here, the reserve ratio (RR) increases to 12.50%, as a result, the money multiplier
falls to eight. This reduces the money supply from the previous calculation (the deposit
remaining the same) the increase in money supply is $85500 that is less compared to the
earlier $199500.
The money multiplier signifies the quantity of money that the banks create with the
deposits available that are identified by the reserve ratio. Reserve is the number of customer
deposits that the reserve bank directs the banks to hold (Bhati Zoysa and Jitaree 2015).
However, the multiplier indicates the growth rate of money lending from a bank. When the
reserve ratio is low, the bank consists of more money to lend which indicates a higher money
multiplier. Contrary to this, when the reserve ratio increases the deposits available for issuing
loan is less implying a smaller multiplier (Jayaraman and Ward 2019). This implies that there
is a reduction in money supply when the reserve ratio increases, which the money multiplier
depicts.
Part b: