Question

In Macroland there is $1,000,000 in currency that can either be held by the public as currency or deposited into banks. Banks' desired reserve/deposit ratio is 10%. If the public of Macroland decides to hold more currency, increasing the proportion they hold from 50% to 75%, the money supply in Macroland will ______.

Answer 1

Answer:

In Macroland there is $1,000,000 in currency that can either be held by the public as currency or deposited into banks. Banks' desired reserve/deposit ratio is 10%. If the public of Macroland decides to hold more currency, increasing the proportion they hold from 50% to 75%, the money supply in Macroland will decrease.

Explanation:

If people decide to increase their currency holding then it will mean that currency deposit ratio will increase. When currency deposit ratio is increased the banks will have fewer reserves. This is likely to reduce the money multiplier, therefore money supply is likely to decrease.