Scenario 11-2.
The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million tazes of required reserves, 75 million tazes of excess reserves, have issued 7,500 million tazes of deposits, and hold 225 million tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all money is on deposit at the bank.
-Refer to Scenario 11-2. Suppose the Bank of Tazi loaned the banks of Tazi 10 million tazes. 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 change?
A) 250 million tazes
B) 200 million tazes
C) 125 million tazes
D) None of the above is correct.

Question

Quizplus · Accepted Answer

The money supply would increase by the amount of the loan, which is 10 million tazes. However, since banks are only required to hold a fraction of deposits as reserves (in this case, 10%), the banks will be able to lend out a multiple of the original loan. Using the money multiplier formula (1/rrr), where rrr is the reserve requirement ratio, we can calculate how much the banks will lend out. In this case, the money multiplier is 1/0.1 = 10. So, the banks will be able to lend out 10 times the original loan, or 100 million tazes. Therefore, the money supply will increase by a total of 110 million tazes (10 million loaned by the central bank and 100 million lent out by the commercial banks), resulting in a total money supply of 7,610 million tazes.

Scenario 11-2. The Monetary Policy of Tazi Is Controlled by the Country's