In Macroland,there is $1,000,000 in currency that can either be held by the public or used by banks as reserves.If the banks' desired reserve-deposit ratio increases from 10% to 15% and the public continues to hold the same amount of currency,the money supply in Macroland will
A) increase.
B) decrease.
C) remain the same.
D) either increase or decrease.
E) increase initially,but then return to the original level.

Question

Quizplus · Accepted Answer

If the banks' desired reserve-deposit ratio increases, it means that banks will hold a higher amount of reserves in proportion to their deposits. As the public continues to hold the same amount of currency, there will be no change in the amount of currency held outside the banking system. However, banks' reserves will increase by $50,000 ($1,000,000 x 0.05), while their deposits remain unchanged. This means that banks will be able to create fewer loans than before, leading to a decrease in the money supply. Therefore, the correct answer is B.

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