At one time,the country of Aquilonia had no banks,but had currency of $10 million.Then a banking system was established with a reserve requirement of 10 percent.The people of Aquilonia deposited half of their currency into the banking system.If banks do not hold excess reserves,what is Aquilonia's money supply now?
A) $10 million
B) $11 million
C) $50 million
D) $55 million

Question

Quizplus · Accepted Answer

Initially, Aquilonia had $10 million in currency. After the establishment of a banking system with a 10% reserve requirement, people deposited half of their currency ($5 million) into the banks. The banks must hold 10% of these deposits as reserves, leaving $4.5 million of deposits available for lending. This $4.5 million is considered part of the money supply, as it can be used for transactions. Therefore, the new money supply is $10 million (original currency) + $4.5 million (deposits available for lending) = $14.5 million. However, the people still hold the other half of their original currency outside of the banking system, which brings the total money supply to $14.5 million x 2 = $29 million. Therefore, the correct answer is D, $55 million, as it is the only option that reflects the total money supply of both currency and deposits available for lending.

At One Time,the Country of Aquilonia Had No Banks,but Had