Scenario 11-1.
The monetary policy of Namdian is determined by the Namdian Central Bank. The local currency is the dia. Namdian banks collectively hold 100 million dias of required reserves, 25 million dias of excess reserves, 250 million dias of Namdian Treasury Bonds, and their customers hold 1,000 million dias of deposits. Namdians prefer to use only demand deposits and so the money supply consists of demand deposits.
-Refer to Scenario 11-1. Suppose the Central Bank of Namdia loaned the banks of Namdia 5 million dias. Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much would the money supply of Namdia change?

Question

Quizplus · Accepted Answer

The money supply in Namdia is determined by the formula: 
Money Supply = Required Reserves ÷ Reserve Requirement
Before the 5 million dias loan, the money supply was:
100 million dias ÷ 0.1 reserve requirement = 1,000 million dias.
After the 5 million dias loan, the banks would have an additional 5 million dias in reserves, which would allow them to increase their loans by 50 million dias, assuming a 10% reserve requirement. However, only 40 million of these loans would actually enter circulation, as the banks would still need to hold 10% of these deposits in reserve. Therefore, the new money supply would be:
1,000 million dias + 40 million dias = 1,040 million dias.
Therefore, the money supply of Namdia would increase by 40 million dias.

Scenario 11-1. The Monetary Policy of Namdian Is Determined by the Namdian