Based on the information in the table, what quantity of reserves would the Federal Reserve have had to inject into the economy in 1932 to prevent the money supply from falling, given that the public increased the amount of currency it held and that banks increased the reserve-deposit ratio?
A)$0.30 billion
B)$0.66 billion
C)$0.89 billion
D)$3.54 billion

Question

Based on the information in the table, what quantity of reserves would the Federal Reserve have had to inject into the economy in 1932 to prevent the money supply from falling, given that the public increased the amount of currency it held and that banks increased the reserve-deposit ratio? 
A)$0.30 billion 
B)$0.66 billion 
C)$0.89 billion 
D)$3.54 billion

Quizplus · Accepted Answer

Bank deposits = (Bank reserves)/(Desired reserve-deposit ratio). The Fed injected $0.30 billion (the public held $0.23 billion as currency and reserves increased by $0.07 billion was held as reserves). However, the money supply still fell by $3.3 billion. It would have taken an additional 0.109 × $3.3 billion = $0.36 billion in reserves to support $3.3 in additional deposits. So the answer is $0.30 billion + $0.36 billion = $0.66 billion.

Based on the Information in the Table, What Quantity of Reserves