Scenario 21-1.
The monetary policy of Namdian is determined by the Namdian Central Bank.The local currency is the dia.Namdian banks collectively hold 100 million dias of required reserves,25 million dias of excess reserves,250 million dias of Namdian Treasury Bonds,and their customers hold 1,000 million dias of deposits.Namdians prefer to use only demand deposits and so the money supply consists of demand deposits.
-Refer to Scenario 21-1.Assume that banks desire to continue holding the same ratio of excess reserves to deposits.What is the reserve requirement and what is the reserve ratio?
A) 2 percent,8 percent
B) 8 percent,10 percent
C) 10 percent,12.5 percent
D) None of the above is correct.

Question

Quizplus · Accepted Answer

The total deposits held by banks is 1,000 million dias, and the ratio of excess reserves to deposits is 25 million/1,000 million or 2.5 percent. If banks desire to continue holding the same ratio of excess reserves to deposits, then the required reserves must be (10/12.5) times the deposits, or 800 million dias. The reserve requirement is then (800 million - 100 million)/1,000 million or 70 percent. Therefore, the reserve ratio is 10 percent, and the correct choice is C.

Scenario 21-1. The Monetary Policy of Namdian Is Determined by the Namdian