In the United Kingdom, the currency drain ratio is 38 percent of deposits and the reserve ratio is 2 percent of deposits. In Australia, the quantity of money is \(\$ 150\) billion, the currency drain ratio is 33 percent of deposits, and the reserve ratio is 8 percent of deposits. a. Calculate the U.K. money multiplier. b. Calculate the monetary base in Australia.

The monetary base, also known as the money base or base money, is the total amount of a country's currency in circulation. It includes both the currency held by the public and the reserve balances held by commercial banks with the central bank. Essentially, it sets the foundation upon which the total money supply in an economy is built.
Understanding the monetary base is crucial because it's the starting point for calculating the money supply, influenced directly by central bank policies. Whenever you hear about central banks 'printing money,' they are essentially increasing the monetary base. The monetary base consists of:

• Currency in circulation: The physical money held by the public.
• Bank reserves: Deposits that commercial banks hold in accounts with the central bank.

The monetary base is an essential tool for assessing the effectiveness of monetary policy actions such as open market operations or changes in the reserve requirements. For instance, when we calculated the Australian monetary base, we found it to be approximately 61.52 billion dollars based on their total money supply and money multiplier.

The reserve ratio is a critical component of banking and monetary policy. It refers to the fraction of customer deposits that each commercial bank must hold as reserves rather than lending out. This reserve can be held as cash in the bank's vault or as deposits with the central bank. The reserve ratio is expressed as a percentage.
The reserve ratio helps ensure stability and solvency in the banking system. Higher reserve ratios can restrict the availability of money for lending, thus reducing the money supply. Lower reserve ratios can have the opposite effect, increasing the money supply.
To illustrate, in the UK's case, the reserve ratio is 2%. This means that for every 100 pounds deposited, the bank keeps 2 pounds as reserves. In Australia, the reserve ratio is higher at 8%, meaning 8 dollars are kept as reserves for every 100 dollars deposited. This direct influence on the money multiplier makes understanding the reserve ratio crucial for studying changes in economic policies and their potential impacts.

The currency drain ratio is another vital concept in understanding the money supply process. It represents the proportion of total deposits that people hold as cash, rather than depositing back into the banking system. Essentially, it shows the public's preference for holding physical currency versus keeping it in their bank accounts.
The currency drain ratio plays a significant role in determining the money multiplier effect. A higher currency drain ratio reduces the money multiplier because more cash is held outside the banking system, thus lessening the potential amount of deposits that can be re-lent by banks.
For example, in the United Kingdom, the currency drain ratio stands at 38%, indicating a relatively high preference for holding cash over deposits. In Australia, the ratio is slightly lower at 33%. These ratios are critical when calculating the money multiplier and, subsequently, understanding the broader impact on the money supply. They reflect behavioral tendencies and can provide insights into economic confidence and liquidity preferences among the public.