. The Monetary Policy of Tazi is controlled by the country’s central bank known

Question

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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.

18. Refer to Scenario 29-2. Suppose the Bank of Tazi loaned the banks of Tazi 10 million tazes. Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much would the money supply change?  

a. 250 million tazes  

b. 200 million tazes  

c. 125 million tazes  

d. None of the above is correct.

Please show how you come up with the answer.

Explanation / Answer

Consider the given problem, so here the “total deposit” is “300+75+7500+225=8100”, so “the fraction of deposit” banks hold is “(300+75)/8100, => 375/8100, => 0.0463”.

So, now if “bank of tazi”, loaned banks of tazi 10 million, then the increase in the money supply is given by, (1/0.0463)*10 = 21.6*10 = 216.

So, the increase in the money supply is given by “216 million”, => (D) be the correct answer.

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