In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired (and current)reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will ________, assuming that the public does not wish to change the amount of currency it holds.
A)increase to 3,133 econs
B)increase to 4,100 econs
C)increase to 4,667 econs
D)decrease to 1,900 econs

Question

Quizplus · Accepted Answer

When commercial banks borrow from the Central Bank, the money supply increases. In this case, the original money supply was 2,000 + (300/ 0.15)= 4,000 econs. The new money supply is 2,000 + [(300 + 100)/ 0.15] = 4,667 econs.

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