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 decreases from 10% to 5% 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

When the desired reserve-deposit ratio decreases from 10% to 5%, banks are required to hold less in reserves and can therefore lend out more money. This results in an increase in the money supply, as there is more money in circulation. Since the public is holding the same amount of currency, the increase in the money supply must come from the banks' increased lending.

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