Suppose that the leakage-adjusted money multiplier can be calculated using a simple modification of our money multiplier
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1/(Reserve Requirement + Excess Reserves + Cash Holding),
Where each component in the denominator is expressed as a percentage. Suppose that the reserve requirement is 25%, but banks on average hold an additional 10% of their deposits as excess reserves. Further, assume that individuals and businesses choose to hold 15% of their borrowed funds in cash. Compare the potential money multiplier with the leakage-adjusted money multiplier. Does the existence of leakages make a significant impact on the ability to conduct monetary policy? Explain why or why not.
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Without the leakages the potential money multiplier would be 1Re...View the full answer
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