Scenario 29-2.
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 29-2. 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 correct answer is A.The money supply is equal to the total amount of money in circulation. In this case, the money supply is equal to the total amount of deposits, which is 7,500 million tazes. When the reserve requirement is changed to 3%, the banks will be required to hold 3% of their deposits as reserves. This means that the banks 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 the banks 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 money supply will increase by the amount of the excess reserves that the banks are no longer required to hold. In this case, the money supply will increase by 75 million tazes. The new money supply will be 7,500 million tazes + 75 million tazes = 7,575 million tazes.

Scenario 29-2. The Monetary Policy of Tazi Is Controlled by the Country's