180
MACROECONOMICS
banks. Base money,
24
in this case, is given by
x M
s
with a required reserve ratio
of
x
. Assume that banks intermediate with zero operating costs and that perfect
competition prevails. The interest on deposits in banks
i
D
must be given by
i
D
=
i
L
(1
-
x
)
(6.24)
This is because a fraction,
x,
of deposits must be held by banks as the
required reserves of non-interest-bearing base money, and so banks can invest
and competitively pass earnings back to customers from only the remaining
(1 –
x
) share of their deposits.
Now consider a bank that has a deposit base of INR 100 and let the bank ...
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