Gce Model Questions Vol1 2017 Economics Question 2

Practice objective / multiple choice question 2 from the 2017 Gce Model Questions Vol1 Economics examination.

Gce Model Questions Vol1 2017 Economics Objective / Multiple Choice Medium Difficulty
Question 2 GCE_MODEL_QUESTIONS_VOL1 • 2017 • ECONOMICS • objective

The monetary base is \(£500\) million. The public holds cash equal to 10 % of total money holdings. Commercial banks keep required reserves of 5 % of deposits and hold excess reserves of 2 % of deposits. (a) Assuming these ratios remain constant, calculate the total money supply. (b) If the central bank raises the required reserve ratio to 8 % and reduces excess reserves to 1 % while the cash‑holding proportion stays at 10 %, what is the new money supply? (c) By what percentage does the money supply change as a result of the policy shift?

Answer Options

Correct Answer A. Initial money supply ≈ £3.07 billion; new money supply ≈ £2.76 billion; the supply falls by about 10 %.
B. Initial money supply ≈ £3.20 billion; new money supply ≈ £2.90 billion; the supply falls by about 9 %.
C. Initial money supply ≈ £2.95 billion; new money supply ≈ £2.70 billion; the supply falls by about 8 %.
D. Initial money supply ≈ £3.07 billion; new money supply ≈ £3.20 billion; the supply rises by about 4 %.
Correct Answer
A
Correct Option:
Initial money supply ≈ £3.07 billion; new money supply ≈ £2.76 billion; the supply falls by about 10 %.

About This Question

This is Gce Model Questions Vol1 2017 Economics Question 2. It is one of the objective questions from the 2017 Gce Model Questions Vol1 Economics examination.

Difficulty level: Medium .

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