Can someone help me with this question. The Monetary Policy of Tazi is controlle
ID: 1116039 • Letter: C
Question
Can someone help me with this 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
Suppose that the Bank of Tazi changes the reserve requirement ratio to 3 percent. Assuming that the banks still want to hold the same percentage of excess reserves what is the value of the money supply after the change in the reserve requirement ratio?
a. 9,375 million Tazes ===> this is the correct answer but I need the solution and formula.
b. 10,000 million Tazes
c. 12,500 million Tazes
d. None of the above is correct to the nearest million salidos.
Explanation / Answer
Correct choice is A
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. Currency in circulation is zero.
Note that deposits = 7500 million and required reserves = 300 million. Reserve requirement ratio is 300*100/7500 = 4%. Currency deposit ratio = 0% and excess reserves to deposit ratio is 75*100/7500 = 1%. Monetary base = Currency in circulation + total reserves = 375 million. Suppose that the Bank of Tazi changes the reserve requirement ratio to 3 percent. Assuming that the banks still want to hold the same percentage of excess reserves. Money multiplier is given by
mm = (1 + C-D)/(R-D + E-D + C-D) = (1)/(3% + 1%) = 25.
Money Supply = monetary base x multiplier = 375 million x 25 = 9375 million.