In Macroland there is $12,000,000 in currency. The public holds half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 12.5 percent, deposits in Macroland equal ________ and the money supply equals ________.
A)$48,000,000; $75,000,000
B)$54,000,000; $54,000,000
C)$48,000,000; $54,000,000
D)$96,000,000; $96,000,000

Question

Quizplus · Accepted Answer

In Macroland, banks hold $6,000,000, which must be 12.5 percent of deposits, so deposits are $6,000,000 × (1/0.125)= $48,000,000. Since the public also holds $6,000,000, the total money supply equals deposits and currency held by public or $48,000,000 + $6,000,000 = $54,000,000.

In Macroland There Is $12,000,000 in Currency