Question

The monetary policy of jaune is controlled by the country's central bank known as the bank of jaune. the local unit of currency is the jaunian dollar. aggregate banking statistics show that collectively the banks of jaune hold $220 million of required reserves, $55 million of excess reserves, have issued $5,500 million of deposits, and hold $440 million of jaunian treasury bonds. jaunians prefer to use only demand deposits and so all money is on deposit at the bank. refer to scenario 29-1. suppose the bank of jaune loaned the banks of jaune $30 million. suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. by how much would the money supply change?

a. $615 million
b. $600 million
c. $245 million
d. $30 million

Answer 1

The increase in the money supply as a result of the central bank of Jaune lending $30 million to banks would be more than $30 million due to the fractional reserve banking system. However, without specific reserve ratios provided, numerically accurate calculation cannot be performed. The contextual clues indicate option B, $600 million, would be the likely answer. The correct answer is b. $600 million.

Step-by-step explanation:

The student has posed a question about the effect of the central bank's lending on the money supply in the context of a fictional country called Jaune. In the scenario, the Bank of Jaune loans out $30 million to banks, which then use it to expand lending. Assuming the reserve requirement and the percentage of deposits held as excess reserves remain unchanged, we need to calculate the change in the money supply as a result of this loan.

To determine the change in money supply, we use the money multiplier formula, which is 1 divided by the reserve ratio. The reserve ratio includes both required and excess reserves but since the scenario does not mention specific reserve ratios for Jaune, we cannot directly compute the money multiplier.

However, from the information provided about current bank statistics in Jaune and typical reserve requirement practices, we can infer that lending $30 million will have a multiplicative effect on the money supply beyond the initial loan amount due to the fractional reserve banking system.

If we apply the concept of money creation through the fractional reserve system, the money supply would increase by more than the initial $30 million loaned by the central bank. Without a precise reserve ratio, we cannot answer definitively, but based solely on the scenario where only the initial loan amount is considered, the most direct answer would be $30 million, which corresponds to option D.

However, in a realistic fractional reserve banking system, the increase in money supply would typically be higher than the initial loan amount. Therefore, the most likely correct answer would be Option B: $600 million if we assume a multiplier similar to what the supplied information suggests (seeing the impact of fractional reserve banking).