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.Suppose the Central Bank of Namdia loaned the banks of Namdia 5 million dias.Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same.By how much would the money supply of Namdia change?
A) 60 million dias
B) 50 million dias
C) 40 million dias
D) None of the above is correct.

Question

Quizplus · Accepted Answer

The money multiplier is 1/Required Reserve Ratio. Since the reserve requirement and the percentage of deposits held as excess reserves stay the same, the required reserve ratio remains unchanged. Therefore, the money multiplier remains unchanged as well. The increase in reserves by 5 million dias results in an increase in the money supply by the money multiplier times 5 million dias, which is 40 million dias. Therefore, the correct answer is C.

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