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In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will _____ to _____ econs, assuming that the public does not wish to change the amount of currency it holds.
A. increase; 3,133
B. increase; 4,100 C. increase; 4,667 D. increase; 2,667

Respuesta :

Answer: Option (C) is correct.

Explanation:

Given that,

Currency held by the public = 2,000 econs

Bank reserves = 300 econs

Desired reserve/deposit ratio = 15 percent

If Commercial banks borrow 100 econs in reserves from the Central Bank.

[tex]\frac{Reserves}{Deposits}[/tex] = 0.15

[tex]\frac{300}{Deposits}[/tex] = 0.15

Deposits = [tex]\frac{300}{0.15}[/tex]

              = 2000

Money supply = Currency held by the public + Deposits

                      = 2,000 + 2,000

                      = 4,000

Money multiplier = [tex]\frac{1}{rr}[/tex]

                          = [tex]\frac{1}{0.15}[/tex]

                          = 6.67

Increase in money supply = Borrowing amount × Money multiplier

                                         = 100 x 6.67

                                         = 667

Hence, money supply increases from 4,000 econs to 4,667 econs.

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