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 that the Bank of Tazi changes the reserve requirement to 3 percent. Assuming that the banks still want to hold the same percentage of excess reserves what is the value of the money supply after the change in the reserve requirement?
A) 9,375 million tazes
B) 10,000 million tazes
C) 12,500 million tazes
D) None of the above is correct to the nearest million tazes.

Question

Quizplus · Accepted Answer

The money supply is equal to the total amount of deposits in the banking system. Before the change in the reserve requirement, the money supply was equal to 7,500 million tazes. After the change in the reserve requirement, the banks will be required to hold 3% of their deposits as reserves. This means that they will have to hold 225 million tazes of reserves (3% of 7,500 million tazes). The banks will still want to hold the same percentage of excess reserves, which is 75 million tazes. This means that they will have to hold a total of 300 million tazes of reserves (225 million tazes of required reserves + 75 million tazes of excess reserves). The banks will then have 7,200 million tazes of deposits available to lend out. The money supply will therefore increase to 9,375 million tazes (7,200 million tazes of deposits + 2,175 million tazes of reserves).

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