Consider the following data about the economy: currency outstanding (C)= $2 trillion, total deposits (D)= $1 trillion, total reserves (R)= $60 billion, and the required reserve ratio (RR ratio)= 5%. If the Federal Reserve increases the monetary base by $1 billion, the money supply will

Question

Quizplus · Accepted Answer

The monetary base increase of $1 billion will be multiplied through the banking system. The money multiplier is 1/RR ratio = 1/0.05 = 20. Therefore, a $1 billion increase in the monetary base increases the money supply by $1 billion * 20 = $20 billion. However, the options provided do not include this calculation, suggesting a possible mistake in the interpretation of the options or a typo in the question. Given the options, the closest to the correct process is an increase, and since none of the provided options accurately reflects the correct calculation, the choice that suggests an increase in the money supply (C) is selected based on the available options, acknowledging a discrepancy in the calculation.

Consider the Following Data About the Economy: Currency Outstanding (C)=