The money supply in Econland is 1,000, and currency held by the public equals bank reserves. The desired reserve-deposit ratio is 0.25. Bank reserves equal ________.

Question

Quizplus · Accepted Answer

Since the desired reserve-deposit ratio is 0.25, the money multiplier is 4. Thus, 4 times bank reserves plus the currency held by the public equals the money supply of 1,000. In this case, since bank reserves (B)equal currency held by the public, then 4B + B = 1,000. Bank reserves equal one fifth of the money supply, or 1,000/5 = 200.

The Money Supply in Econland Is 1,000, and Currency Held