Business Finance
ECO 320 Money Supply Using the Money Multiplier Discussion Questions

ECO 320

ECO

Question Description

I’m studying for my Management class and don’t understand how to answer this. Can you help me study?

1.Explain the money supply using the money multiplier and high powered money (10 marks) 2.Using a well-labelled diagram, explain the components of the financial system

3. Give at least four (4) types of universal banks (8 marks

4. Discuss at least three (3) types of finance companies. Give an example of each in Kenya (3 marks)

5. Elaborate three (3) reasons for currency devaluation (6 marks)

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Final Answer

sending the final one soon

Running head: Macroeconomics

1

1. Explain the money supply using the money multiplier and high powered money (10
marks)
Money supply is a key macroeconomic aspect that impacts economic growth by
regulating economic activities in both private and public sectors through availability of
liquidity (Cordelia & Michael, 2019). Money supply enables the private sector to obtain
credits to support their business practices at a price rate referred to as interest rates. Money is
normally a liability of a country’s central bank. Van (2019) asserts that the central bank
regulates the monetary base by contracting or expanding it based on the economic
performance of an economic territory. Nevertheless, the money supply is usually a multiple
of the total monetary base, whereby the monetary base entails the total amount of money in
circulation plus in bank reserves in an economy.
Money supply, on the other hand, involves two broad financial tools consisting of
checking deposits and currency, where both can be used for exchanging goods and services.
Moreover, money supply can also be used to refer to currency and checking deposits as well
as money market mutual funds and saving deposits. Since the central bank can regulate the
monetary base so as to enable corrective measures on an economy, they use various measures
to determine the possible outcomes of their decisions.
The money multiplier is one of the tools used in such cases. Money multiplier denotes
the maximum magnitude of impact that changes in monetary base in an economy affects the
money supply. It is normally equal to the ratio of decrease or increase in money supply to the
decrease or increase in monetary base. In simple terms, the money multiplier is represented in
1

form of: , r denotes the required reserve ratio. The required reserve ratio refers to the
𝑟

fraction of money deposits that a bank holds in its account. THe amount that it can lend out

should be the excess reserves, which is the amount remaining after deducting their required
reserves.
Therefore, the money multiplier influences the money supply through an increase in
the required reserve ratio in the central bank will lessen the excess reserves held by banks,
which in turn lessens the amount that banks can lend to customers and thus lower the money
multiplier.
High Powered Money
High-powered money refers to the entails the total amount of money in circulation
plus in bank reserves in an economy. The utilization of High Powered Money (H) comprises
of the required reserves in the central bank (RR), the amount of excess reserves (ER), and the
demand for money in circulation (C). Hence,
𝐻 = 𝐶 + 𝑅𝑅 + 𝐸𝑅
The required reserves of a commercial bank rely on its deposits. Furthermore, a bank has to
keep an excess amount of money, which they lend to its customers. This way banks can meet
unanticipated withdrawals, which may render them bankrupt. The money supply is therefore
regulated with respect to the required reserved ratio as well as the excess ratio. Furthermore,
the demand of money by the public is associated with bank deposit ratio. The currency ratio
is influenced by fluctuation of income levels of the public, public utilization of credit
instruments, as well as unforeseen economic fluctuations. Hence, the formal relation between
high-powered money and money can t...

DrWood (10738)
Duke University

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