Meditorian Banking Statistics
The monetary policy of Meditor is determined by the Meditorian Central Bank. The local currency is the medit. Meditorian banks collectively hold 100 million medits of required reserves, 25 million medits of excess reserves, 250 million medits of Meditorian Treasury Bonds, and their customers hold 1,000 million medits of deposits. Meditorians prefer to use only demand deposits and so all currency is on deposit at the bank.
-Refer to Meditorian Banking Statistics.Suppose that the Central Bank of Meditor purchases 25 million medits of Meditorian Treasury Bonds from banks.Suppose also that both the required reserve ratio and the percentage of deposits held as excess reserves stay the same.By how much would the money supply of Meditor change?
A)200 million medits
B)150 million medits
C)100 million medits
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The purchase of 25 million medits of Treasury Bonds by the Central Bank increases the reserves by 25 million medits. With a required reserve ratio of 10% (100 million required reserves / 1,000 million deposits), the money multiplier is 10. Thus, the increase in reserves can potentially increase the money supply by 25 million * 10 = 250 million medits. However, since the excess reserves ratio remains the same, the effective increase in the money supply is 200 million medits.

Meditorian Banking Statistics The Monetary Policy of Meditor Is Determined by the Meditorian