Question

Refer to Scenario 29-1 . Suppose the Central Bank of Namdia purchases 25 million dias of Namdian Treasury Bonds from banks. 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 of Namdia change?

Answer 1

The correct solution will be "200 million dias".

Step-by-step explanation:

Reserves required

= 100 million dias

Reserves excess

= 25 million dias

Deposits

= 1,000 million

Treasury Bonds

= 250 million

C = 0

Now,

The money multiplier will be:

=
`[(1 + (C)/(D) )/(((C)/(D) + (RR)/(D) + (ER)/(D) )) ]`

On substituting the values, we get

=
`[(1 + (0)/(1000) )/(((0)/(1000) + (100)/(1000) + (25)/(1000) )) ]`

=
`[(1)/((0.1 + 0.025)) ]`

=
`8`

Whenever the Namdia Federal Reserve buying 25 million dollars of Namdian Treasury Securities, the quantity of money helps to improve by:

=
`25 \ million \ dias* Money \ multiplier`

On putting the values, we get

=
`25 \ million \ dias* 8`

=
`200 \ million \ dias`