Suppose That the Banking System Has Excess Reserves of $10

question 80

Multiple Choice

Suppose that the banking system has excess reserves of $10 million, the desired reserve ratio is 10 percent and the currency drain ratio is 40 percent. By how much will the quantity of money increase?

• A)$12.5 million
• B)$28 million
• C)$50 million
• D)$40 million
• E)$22 million

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Definitions:

Marginal Utility

This term refers to the additional satisfaction or utility gained by consuming one more unit of a good or service.

Rational Consumer

An economic theory assumption that consumers make purchasing decisions based on their rational outlook, available information, and self-interest to maximize utility.

Income Effect

A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price.

Normal Good

A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.