In Macroland,there is $1,000,000 in currency that can either be held by the public or used by banks as reserves.The banks' desired reserve-deposit ratio is 10%.If the public of Macroland decides to hold less currency,decreasing the proportion they hold from 50% to 25%,the money supply in Macroland will
A) increase.
B) decrease.
C) remain the same.
D) may either increase or decrease.
E) will increase initially,but then return to the original level.

Question

Quizplus · Accepted Answer

Initially, the total currency in circulation is $1,000,000, out of which the public holds 50%, or $500,000, and banks hold the remaining 50%, or $500,000 as required reserves. If the public decides to hold less currency and decreases their proportion to 25%, the amount held by the public decreases to $250,000, which means that $250,000 becomes available for deposit in banks. With a desired reserve-deposit ratio of 10%, banks can lend out $225,000 (90% of $250,000) of this newly available deposit, which will result in an increase in the money supply by $225,000. Therefore, the overall money supply in Macroland will increase to $1,225,000.

In Macroland,there Is $1,000,000 in Currency That Can Either Be