You are given the following information about the economy of Nocoin: The banks have deposits of $300 billion.Their reserves are $15 billion, two thirds of which is in deposits with the bank.Households and firms hold $30 billion in bank notes.There are no coins!
The banks have no excess reserves.
The Bank of Nocoin, the central bank, increases bank reserves by $0.5 billion.The quantity of money _______.
The change in the quantity of money is not equal to the change in the monetary base because _______.
The money multiplier is _______.
A)increases; the monetary base includes bank deposits; 7.0
B)increases; when bank reserves increase, banks loan out their excess reserves and a multiplier process ensues; 7.33
C)decreases; an increase in monetary base brings about a decrease in the quantity of money; 7.33
D)decreases; money includes currency, but the monetary base does not include currency; 7.0
E)increases; the components of the monetary base are not the components of the quantity of money; 7.0

Question

Quizplus · Accepted Answer

When the Bank of Nocoin increases bank reserves by $0.5 billion, banks now have additional reserves available to lend out, leading to an increase in the quantity of money through the multiplier process. The change in the quantity of money is not equal to the change in the monetary base because only a portion of the monetary base (reserves) is used to create money through loans. The money multiplier is calculated as the ratio of the quantity of money to the monetary base, which in this case is 7.33 (($300 + $30) / $15).

You Are Given the Following Information About the Economy of Nocoin