You are given the following information about the economy of Nocoin: The banks have deposits of $300 billion. Their reserves are $15 billion, two thirds of which is in deposits with the central bank. Households and firms hold $30 billion in bank notes. There are no coins!
The banks have no excess reserves.
The Bank of Nocoin, the central bank, increases bank reserves by $0.5 billion.
The quantity of money ________.
The change in the quantity of money is not equal to the change in the monetary base because ________.
The money multiplier is ________.
A)increases; when bank reserves increase, banks loan out their excess reserves and a multiplier process ensues; 7.33
B)decreases; money includes currency, but the monetary base does not include currency; 7.0
C)decreases; an increase in monetary base brings about a decrease in the quantity of money; 7.33
D)increases; the components of the monetary base are not the components of the quantity of money; 7.0
E)increases; the monetary base includes bank deposits; 7.0

Question

Quizplus · Accepted Answer

When the central bank increases bank reserves, banks can loan out their excess reserves, leading to a multiplier process which increases the quantity of money. The money multiplier in this scenario is calculated as 1/[(1 - Required Reserve Ratio) + (Excess Reserves/Deposits held by banks)]. In this case, since there are no excess reserves, the money multiplier is 1/[(1 - 2/3) + 0], which equals 1/1/3 or 7.33. Therefore, the quantity of money increases when bank reserves increase. The change in the monetary base does not lead to a proportional change in the quantity of money because the money multiplier affects how much banks can loan out their excess reserves.

You Are Given the Following Information About the Economy of Nocoin