Chapter 4, Problem 1QQ

To determine

The money supply in an economy.

Answer to Problem 1QQ

Option ‘c’ is the correct answer.

Explanation of Solution

Option (c):

The supply of money in an economy depends on the monetary base, the reserve-deposit ratio, and the currency-deposit ratio. The monetary base means the amount of currency held by the public .The reserve –deposit ratio is the fraction of deposits that banks hold as reserves. The currency deposit ratio is the amount of currency that people hold for a fraction of their holdings. Therefore, in the given options, option ‘c’ does not come under these three categories. Hence, option ‘c’ is not a part of the money supply.

Thus option (c) is correct.

Option (a):

The metal coins which is used in an economy is a part of the monetary base of the economy. Therefore in the given options, option ‘a’ is part of the money supply. Thus, option (a) is incorrect.

Option (b):

The monetary base in an economy is the total amount that public held as a currency plus the banks held as reserves. Therefore in the given options, option ‘b’ is a part of the money supply. Thus, option (b) is incorrect.

Option (d):

The currency deposit ratio is the amount of currency that people hold for a fraction of their holdings which is a part of money supply. Therefore, option ‘d’, is a part of the currency-deposit ratio. Thus, option (d) is incorrect.

Economics Concept Introduction

Money supply: The money supply is the total quantity of money available in an economy at a given time period.