Scenario 29-1.
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 29-1.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?
A)60 million dias
B)50 million dias
C)40 million dias
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The money supply in Namdia changes by the amount of the initial loan, which is 5 million dias, multiplied by the reciprocal of the required reserve ratio. Since the reserve requirement and excess reserve ratios stay the same, the reciprocal of the required reserve ratio is still 0.1. Therefore, the change in the money supply is 5 million dias / 0.1 = 50 million dias. However, the banks also have 25 million dias of excess reserves, so only 40 million dias of new loans can be made, which increases the money supply by that amount.

Scenario 29-1. The Monetary Policy of Namdian Is Determined by the Namdian