In Econland, all $5 000 000 in currency is held by banks as reserves.The public does not hold any currency.If the banks' desired reserve-deposit ratio is 10 per cent, the money supply in Econland equals:
A)$4 545 545
B)$5 000 000
C)$5 500 000
D)50 000 000

Question

Quizplus · Accepted Answer

The money supply in Econland can be calculated using the money multiplier formula, which is 1/reserve ratio. With a 10% reserve ratio (0.10), the money multiplier is 1/0.10 = 10. Therefore, the money supply equals the total reserves multiplied by the money multiplier: $5,000,000 * 10 = $50,000,000.

In Econland, All $5 000 000 in Currency Is Held