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.
A)increase; 4,000
B)increase; 5,000
C)decrease; 4,000
D)decrease; 5,000

Question

Quizplus · Accepted Answer

When the Central Bank lowers the required reserve/deposit ratio, banks will have more excess reserves on hand. This means more lending and an increase of the money supply. In this case, the original money supply was 2,000 + (300/0.15)= 4,000 econs. The new money supply is 2,000 + (300/0.1)= 5,000 econs.

In Macroland, Currency Held by the Public Is 2,000 Econs