Question

Question 9 (1 point) At one time, the country of Aquilonia had no banks, but had currency of $10 million. Then a banking system was established with a reserve requirement of 10 percent. The people of Aquilonia deposited half of their currency into the banking system. If banks do not hold excess reserves, what is Aquilonia's money supply now? $55 million $10 million $50 million $11 million Question 10 (1 point) Suppose the reserve ratio is 25 percent and the public holds $10 million in cash. Then the public decides to withdraw $5 million from the banks. How does the money supply eventually change? falls by $5 million falls by $20 million falls by $15 million falls by $10 million

Answer 1

9. The correct answer is $55 million

we know that

Money Multiplier = 1/required reserve ratio

Money Multiplier = 1/ 0.10 = 10

Initial deposit = $5 million

Total deposits = initial deposit × Money Multiplier

Total deposits = 5 × 10 = 50 million.

So the Money supply = total deposits + currency in hand.

Money supply = 50 + 5 = 55 million.

10. The correct answer is fall by $20 million

First we calculate

money Multiplier = 1/reserve required ratio

Money Multiplier = 1/ 0.25 = 4.

Initial Money withdrawal = $5 million

Total money withdrawal = initial withdrawal × Money Multiplier

So money withdrawal = 5 × 4 = $20 million

Hence Money supply fall by $20 million