Question

The money supply in Econland is 1,000, and currency held by the public equals bank reserves. The desired reserve-deposit ratio is 0.25. Bank reserves equal _____.

a) 250
b) 800
c) 500
d) 200

Answer 1

When the desired reserve-deposit ratio is 0.25 and the money supply is 1,000, bank reserves are calculated to be 250, which is option (a).

Step-by-step explanation:

The question pertains to the calculation of bank reserves in an economy given the desired reserve-deposit ratio. In the scenario described for Econland, where the money supply is 1,000 and the desired reserve-deposit ratio is 0.25, the calculation of bank reserves would be straightforward. We would multiply the total money supply by the reserve-deposit ratio to determine the amount that the banks need to hold as reserves. In this case, it would be 1,000 multiplied by 0.25, which equals 250.

Therefore, bank reserves equal 250, which corresponds to option (a).