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Macroeconomics

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Changing the Reserve Requirement: Complex Multiplier

MACRO-SZVTBV

Suppose that the monetary base is $700$ billion dollars. Also suppose that desired excess reserves are $5\%$ and the public desires to hold $50$ cents cash for every dollar of demand deposits. This means we must use the money multiplier of $m=\frac{1+c}{c+r+e}$, where $r$ is the reserve requirement, $e$ is the desired excess reserve ratio, and $c$ is the cash to demand deposit ratio. Suppose that the reserve requirement is initially $4\%$, but falls to $3\%$.