If the Central Bank of Macroland puts an additional 1,000 units of currency into the economy, the public deposits all currency into the banking system, and banks have a desired reserve/deposit ratio of 0.10, then the banks will eventually make new loans totaling ______ and the money supply will increase by _______.

Question

Quizplus · Accepted Answer

Since the desired reserve ratio of banks is 0.10, the initial excess reserve created by the additional 1,000 units of currency will be 900 (1,000 x 0.10). Banks can use this to create new loans. Using the money multiplier formula, loans will eventually total 9,000 (900/0.10). Therefore, the money supply will increase by 10,000 (9,000 + 1,000). Option C is the only one that matches this calculation.

If the Central Bank of Macroland Puts an Additional 1,000