Question

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the required reserve/deposit ratio is 15 percent. If the Central Bank lowers the required reserve/deposit ratio making the new desired ratio equal to 10 percent, then the money supply in Macroland will _____ to _____ econs, assuming that the public does not wish to change the amount of currency it holds.

Answer 1

Increase, 5,000

Step-by-step explanation:

Currency held by public = 2,000

Reserves held by banks = 300

Reserve requirement is 15%

2,000*15% = 300. Bank keep 300 out of 2,000 which raise reserves from 300 to 600. Money supply in economy is (600 / Money multiplier) = (600 / 0.15) = 4,000.

If reserve requirement is 10%

2,000*10% = 200. Bank keep 200 out of 2,000 which raise reserves from 300 to 500. Money supply in economy is (500 / Money multiplier) = (500 / 0.1) = 5,000.

Conclusion: The money supply in Macroland will increase to 5,000.