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At one time, the country of Sylvania had no banks, but had currency of $10 million....

At one time, the country of Sylvania had no banks, but had currency of $10 million. Then a banking system was established with a reserve requirement of 20 percent. The people of Sylvania now keep half their money in the form of currency and half in the form of bank deposits. If banks do not hold excess reserves, how much currency do the people of Sylvania now hold?

a.

$2 million

b.

$5 million

c.

$9 million

d.

$12 million

                                                       
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Answer #1

Option C. $9 million

Explanation: The currency not deposited by people in bank = 50% of 10 million = $5 million

The remaining $5 million was deposited din the bank. Out of this $5 million deposit, the bank keeps 20% of it i.e. 20% of 5 million = 1 million as reserve.

So, the bank loans out the remaining $4 million to people.

So, total currency hold by people = $4 million + $5 million = $4 million.

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