The money supply is $10 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.2.Bank reserves are equal to
A)$1.6 million.
B)$2 million.
C)$4 million.
D)$8 million.

Question

Quizplus · Accepted Answer

Bank reserves are calculated as the sum of currency held by the nonbank public and the reserves held by banks. Given the reserve-deposit ratio is 0.2 and the currency held by the nonbank public is $2 million, we can infer that the total deposits are $8 million (since the money supply is $10 million and the money supply includes both currency held by the nonbank public and deposits). With a reserve-deposit ratio of 0.2, the reserves held by banks would be 0.2 * $8 million = $1.6 million.

The Money Supply Is $10 Million,currency Held by the Nonbank