Question

The Monetary Policy of Tazi is controlled by the country's central bank known as the Bank of Tazi. The local unit of currency is the taz. Aggregate banking statistics show that collectively the banks of Tazi hold 300 million tazes of required reserves, 75 million tazes of excess reserves, have issued 7,500 million tazes of deposits, and hold 225 million tazes of Tazian Treasury bonds. Tazians prefer to use only demand deposits and so all money is on deposit at the bank.

Answer 1

Answer:

c. 1,250 million tazes

Explanation:

First we need to calculate the reserve ratio as follow

Reserve ratio = Required reserves / Total Deposits

Where

Required Reserves = 300 million tazes

Total Deposits = 7,500 million tazes

Placing values in the formula

Reserve ratio = 300 million tazes / 7,500 million tazes

Reserve ratio = 0.04

Reserve ratio = 4%

Now calculate the Money multiplier using following formula

Money Multiplier = 1 / Required reserves ratio

Placing values in the above formula

Money Multiplier = 1 / 4%

Money Multiplier = 1 / 0.04

Money Multiplier = 25

Calculate the Change in money Supply

Change in money supply = Value of treasury bond x Money Multiplier

Placing values in the formula

Change in money supply = 50 million tazes x 25

Change in money supply = 1,250 million tazes