Question

If the Central Bank of Macroland puts an additional 1,000 dollars of currency into the economy, the public deposits all currency into the banking system, and banks have a desired reserve/deposit ratio of 0.10, then the banks will eventually make new loans totaling ______ and the money supply will increase by _______.

a. 9,000; 10,000
b. 9,000; 9,000
c. 10,000; 9,000
d. 10,000; 10,000

Answer 1

a. 9,000; 10,000

Step-by-step explanation:

The computation is shown below:

The money multiplier is

= 1 ÷ 0.10

= 10

Now If $1,000 are deposited in banks and the expected reserve ratio is 0.10 ration so the lending amount is $900.

And now if we considered the money multiplier, so it would be increased by

= $900 × $10

= $9,000

And, the increase in money supply is

= $9,000 + $1,000

= $10,000

Hence, the correct option is a.