In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 10%.If the Central Bank prints an additional 200 econs and uses this new currency to buy government bonds from the public, the money supply in Macroland will increase from ______ econs to ______ econs, assuming that the public does not wish to change the amount of currency it holds.

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Quizplus · Accepted Answer

The initial money supply is currency held by the public (2,000 econs) plus deposits (3,000 econs, calculated from reserves of 300 econs and a reserve ratio of 10%). The total initial money supply is 5,000 econs. With the Central Bank's action, the reserves increase by 200 econs, allowing deposits to increase by 2,000 econs (200/0.10), making the new money supply 7,000 econs.

In Macroland, Currency Held by the Public Is 2,000 Econs