The money supply is $6 million,currency held by the nonbank public is $2 million,and the reserve-deposit ratio is 0.1.The monetary base is equal to
A)$2 million.
B)$2.4 million.
C)$2.6 million.
D)$4 million.

Question

Quizplus · Accepted Answer

The formula for the monetary base is: Monetary Base = Currency Held by Non-bank Public + Reserves
We are given that currency held by non-bank public is $2 million.
We can find that the total reserves are: 
Reserves = Reserve-Deposit Ratio * Deposits
Reserves = 0.1 * Deposits = 0.1 * (Money Supply - Currency Held by Non-bank Public) = 0.1 * ($6 million - $2 million) = $0.4 million
Therefore, the monetary base is: 
Monetary Base = Currency Held by Non-bank Public + Reserves = $2 million + $0.4 million = $2.4 million.

The Money Supply Is $6 Million,currency Held by the Nonbank