There Is $5,000,000 of Currency in Econland, All Held by Banks

question 84

Multiple Choice

There is $5,000,000 of currency in Econland, all held by banks as reserves. The public does not hold any currency. If the banks' desired reserve/deposit ratio is 0.25, then the money supply equals:

• A)$5,000,000
• B)$6,250,000
• C)$10,000,000
• D)$20,000,000

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Definitions:

Interest Rate Parity Theory

This theory suggests that the difference between the exchange rates of two currencies is equal to the ratio of the interest rates between those two countries, thereby preventing arbitrage opportunities.

Exchange Rates

The price of one country's currency expressed in another country's currency.

Equilibrium

A condition or state where supply equals demand, resulting in a stable market environment.

Currency Selection Return

The return attributed to the choice of currency in which investments are denominated.