List of Formulas for Midterm Exam 3

Fei Tan
Note: this list provides selective though not exhaustive formulas that you are expected
to know in preparation for Midterm Exam 3 (Chapter 12 and 13). The actual formulas
that will be helpful for solving problems in this exam should be a proper set of this list.
Good luck!
1. The amount of reserves that a bank can loan out when new deposits come in can be computed
as
loans = new deposits (1 RR)

(1)

where RR is the required reserve ratio.

2. The simple deposit multiplier can be computed as:
simple deposit multiplier =

1
RR

(2)

where RR is the required reserve ratio.

3. The change in checking account deposits can be computed as:
change in checking account deposits = change in bank reserves

1
RR

(3)

where RR is the required reserve ratio.

4. The quantity theory of money is a theory about the connection between money and prices.
The theory is essentially an equation that states that the money supply (M ) multiplied by the
velocity of money (V ) equals the price level (P ) multiplied by real output (Y ):
M V =P Y

(4)

where the velocity of money (V ) is assumed to be constant!

5. If the velocity of money is constant, then the growth rate of velocity is zero and the connection
between money and prices can be expressed as
inflation rate = growth rate of money supply growth rate of real output

(5)