In CFA Book 2 (EC.) page 363/364 gives an example of currency drain and dessired reserves. It says that the drain ratio is 50% and when the fed gives extra 100.000 the first step in the process starts with 33.333 of drain holded in cash by the depositors. I don’t understand why it is not 50.000$? It looks like it does some calculation because 33.333 is 1/2 of the actual first diposit (66.667$) Can help?
Fed provides an extra $100,000 Currency drain ratio = currency / deposits currency = $40,000 deposits = $60,000 CDR = 0.666667
still dont get it. It says in the book that the cdr is 50%
presumably its because of a reserve ratio? If fed gives 100k, x amount is held by the bank (to keep at min reserve), then the rest is loaned out. Of what is loaned out 50% is kept in cash. I don’t have the book on me, but thats my guess.
seems right but that is not whtat the numbers in the book say. ??
nicob is exactly right. The book does not say that the currency drain ratio is 50%. It just says that the the currency drain is 50% of the deposits. Actually the currency drain at every stage here is 33.33%. Hope you got it now.
currency drain is currency/deposits. that is cash outside the fractional banking system as is held in hands (preferably mine). what is left are deposits. there is then a required reserve ratio (one of the ways the CB can influence money supply) which is kept for possible withdrawals. i don’t want to rob you of your learning experience, but don’t get bogged down here. move on. there’s more exciting and beneficial things to understand. understand that the fed uses the R.R.R to influence MS and ensure a safety net, understand that not all loans are deposited at banks (currency drain), understand the effects of the multiplier and why $100 can be turn into larger amounts.
charley, nicob is right …but if you are still curious, this was an example of 50% drain ratio and 10% reserve) Think of drain as something that banks need to hold freeze the currency with them Let x be the amount bank shoould lend. The Drain dictates .5x in currency. so as below, x=66,667 and drain will be 33,337. 100K = x/2+x=3x=200 => x=200/3 => 66,667 Now, given 10% reserve, the rcving banks will reserve 10%of66,667 and release 60,000 in loans. The new bank’s Drain requirment will make them hold freeze 2/3of60K=20K and lend 40K… and so on… So your multiplier will now be (1+Drain)/(Drain+Reserve) = 1.5/.5+.1 = 1.5/.6=2.5