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In the fictional country of Econland, the central bank reports certain monetary statistics for two consecutive years. In Year 1, the monetary base is $10 billion, the currency-deposit ratio is 0.3, and the reserve-deposit ratio is 0.2. In Year 2, the monetary base increases to $12 billion, and the currency-deposit ratio rises to 0.4, while the reserve-deposit ratio remains unchanged. Given this information, which of the following statements are true? (Select all that apply.)This is a multi answer question. You can select one or more options as the answer.A.The amount of currency in Year 1 is $3 billion.B.The money supply in Year 1 is greater than $40 billion.C.The increase in the monetary base from Year 1 to Year 2 is 20%.D.The money supply in Year 2, given the changes in the monetary base and currency-deposit ratio, is less than $30 billion.E.The reserve amount in Year 2 is greater than $2.4 billion.

Question

In the fictional country of Econland, the central bank reports certain monetary statistics for two consecutive years. In Year 1, the monetary base is 10billion,thecurrency−depositratiois0.3,andthereserve−depositratiois0.2.InYear2,themonetarybaseincreasesto10 billion, the currency-deposit ratio is 0.3, and the reserve-deposit ratio is 0.2. In Year 2, the monetary base increases to 12 billion, and the currency-deposit ratio rises to 0.4, while the reserve-deposit ratio remains unchanged. Given this information, which of the following statements are true? (Select all that apply.)This is a multi answer question. You can select one or more options as the answer.A.The amount of currency in Year 1 is 3billion.B.ThemoneysupplyinYear1isgreaterthan3 billion.B.The money supply in Year 1 is greater than 40 billion.C.The increase in the monetary base from Year 1 to Year 2 is 20%.D.The money supply in Year 2, given the changes in the monetary base and currency-deposit ratio, is less than 30billion.E.ThereserveamountinYear2isgreaterthan30 billion.E.The reserve amount in Year 2 is greater than 2.4 billion.

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Solution

A. The amount of currency in Year 1 is $3 billion.

This statement is incorrect. The currency-deposit ratio is 0.3, which means that for every dollar in deposits, there is $0.3 in currency. However, we don't know the total amount of deposits, so we can't calculate the total amount of currency.

B. The money supply in Year 1 is greater than $40 billion.

This statement is also incorrect. The money supply is calculated as the monetary base divided by the sum of the currency-deposit ratio and the reserve-deposit ratio. In Year 1, this would be 10billion/(0.3+0.2)=10 billion / (0.3 + 0.2) = 20 billion.

C. The increase in the monetary base from Year 1 to Year 2 is 20%.

This statement is correct. The monetary base increased from 10billionto10 billion to 12 billion, which is a 20% increase.

D. The money supply in Year 2, given the changes in the monetary base and currency-deposit ratio, is less than $30 billion.

This statement is correct. The money supply in Year 2 is calculated as 12billion/(0.4+0.2)=12 billion / (0.4 + 0.2) = 20 billion, which is less than $30 billion.

E. The reserve amount in Year 2 is greater than $2.4 billion.

This statement is incorrect. The reserve amount is calculated as the monetary base times the reserve-deposit ratio. In Year 2, this would be 12billion∗0.2=12 billion * 0.2 = 2.4 billion, which is not greater than $2.4 billion.

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