Scenario 29-1
The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the Tazian dollar. Aggregate banking statistics show that collectively the banks of Tazi hold $375 million of required reserves, $225 million of excess reserves, have issued $7,500 million of deposits, and hold $750 million of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all money is on deposit at the bank.
-Refer to Scenario 29-1. Suppose the Bank of Tazi loaned the banks of Tazi $30 million. Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much would the money supply change?
A)$425 million
B)$375 million
C)$220 million
D)$30 million

Question

Quizplus · Accepted Answer

The money multiplier is calculated as 1 divided by the reserve ratio. The reserve ratio is the sum of required and excess reserves divided by total deposits, which is ($375 million + $225 million) / $7,500 million = 0.08. The money multiplier is 1 / 0.08 = 12.5. If the central bank loans $30 million to the banks, the money supply would increase by $30 million * 12.5 = $375 million.

Scenario 29-1 The Monetary Policy of Tazi Is Controlled by the Country's