Suppose that banks' average desired reserve ratio is 5% of total deposits, and the currency drain ratio is 45%

Question

If the Bank of Canada increases the monetary base by $0.2 million, what will be the total CHANGE in the money supply generated by the depository institutions (that is, the additional quantity of money created by the banking system, excluding the change in the monetary base)?

Answer 1

45%+5%=50% = 0.5

Money multiplier=1/0.5 =2

Change in money supply:

0.2 * 2=+$0.4 millions

"Induced change in money supply" = "Resulted Money supply change" - "Initial monetary base change" =

=0.4-0.2=+$0.2 millions

Answer: the additional quantity of money created by the banking system, excluding the change in the monetary base is +$0.2 millions.