You Are Given the Following Information About the Economy of Nocoin

question 8

Multiple Choice

You are given the following information about the economy of Nocoin: The banks have deposits of $300 billion. Their reserves are $15 billion, two thirds of which is in deposits with the central bank. Households and firms hold $30 billion in bank notes. There are no coins!
The banks have no excess reserves.
The Bank of Nocoin, the central bank, increases bank reserves by $0.5 billion.
The quantity of money ________.
The change in the quantity of money is not equal to the change in the monetary base because ________.
The money multiplier is ________.

• A)increases; when bank reserves increase, banks loan out their excess reserves and a multiplier process ensues; 7.33
• B)decreases; money includes currency, but the monetary base does not include currency; 7.0
• C)decreases; an increase in monetary base brings about a decrease in the quantity of money; 7.33
• D)increases; the components of the monetary base are not the components of the quantity of money; 7.0
• E)increases; the monetary base includes bank deposits; 7.0

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Definitions:

Floating Rate

An interest rate that changes over time as it is tied to an underlying benchmark or index, commonly used in loans and bonds.

Bond Indenture

A legal contract between a bond issuer and bondholders, detailing the terms and conditions under which a bond is issued, including the interest rate, maturity date, and covenants.

Protective Covenants

Legal stipulations in loan agreements that aim to preserve the value of the collateral and ensure borrowers uphold specific conditions.

Repayment Arrangements

Agreements between a lender and borrower detailing the terms for paying back a loan, including payment schedule and interest rates.