Question

Scenario 29-1 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 money supply would change by $615 million. To calculate the change in the money supply, we need to consider the money multiplier effect. When the bank of Jaune loans $30 million to the banks of Jaune, the initial loan will result in a change in the money supply of $615 million. the correct answer is a. $615 million.

Step-by-step explanation:

The money supply would change by $615 million. To calculate the change in the money supply, we need to consider the money multiplier effect. The money multiplier is calculated as 1 / required reserve ratio. In this case, the required reserve ratio can be calculated as (required reserves + excess reserves) / deposits.

Using the given numbers, the required reserve ratio is (220 million + 55 million) / 5,500 million = 0.045. Therefore, the money multiplier is 1 / 0.045 = 22.22.

Now, we can calculate the change in the money supply. When the bank of Jaune loans $30 million to the banks of Jaune, those banks will use the excess reserves to make loans to individuals and businesses.

Let's assume that the entire $30 million is loaned out and deposited back into the banks. Since the money multiplier is 22.22, the initial $30 million loan will result in a change in the money supply of $30 million * 22.22 = $666.6 million.

However, we also need to consider that the banks of Jaune will have to hold a portion of the loan as required reserves. The required reserve ratio is still the same, so the banks will have to hold 0.045 * $30 million = $1.35 million as reserves. Therefore, the net change in the money supply is $666.6 million - $1.35 million = $615 million.