Neco Model Questions Vol1 2018 Economics Question 47

Practice objective / multiple choice question 47 from the 2018 Neco Model Questions Vol1 Economics examination.

Neco Model Questions Vol1 2018 Economics Objective / Multiple Choice Medium Difficulty
Question 47 NECO_MODEL_QUESTIONS_VOL1 • 2018 • ECONOMICS • objective

The central bank requires banks to hold a required reserve ratio of 5% of deposits. The public holds currency equal to 20% of the total deposits held by banks. If the central bank purchases \(\text{₦}500\) million of government securities from the open market, (a) calculate the monetary multiplier before any change in policy, (b) determine the maximum possible increase in the money supply resulting from the purchase, and (c) if the required reserve ratio is later raised to 8% while the currency‑deposit ratio remains unchanged, what is the new multiplier and the corresponding maximum increase in money supply from the same \(\text{₦}500\) million purchase?

Answer Options

A. Original multiplier = 5.2; increase = ₦2,600 million. New multiplier ≈ 4.6; increase ≈ ₦2,300 million.
B. Original multiplier = 4.5; increase = ₦2,250 million. New multiplier ≈ 4.0; increase ≈ ₦2,000 million.
Correct Answer C. Original multiplier = 4.8; increase = ₦2,400 million. New multiplier ≈ 4.29; increase ≈ ₦2,143 million.
D. Original multiplier = 5.0; increase = ₦2,500 million. New multiplier ≈ 4.5; increase ≈ ₦2,250 million.
Correct Answer
C
Correct Option:
Original multiplier = 4.8; increase = ₦2,400 million. New multiplier ≈ 4.29; increase ≈ ₦2,143 million.

About This Question

This is Neco Model Questions Vol1 2018 Economics Question 47. It is one of the objective questions from the 2018 Neco Model Questions Vol1 Economics examination.

Difficulty level: Medium .

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