Chapter 25, Problem 5MCQ

To determine

The correct option that defines the banking regulations.

Answer to Problem 5MCQ

Option d is correct.

Explanation of Solution

Explanation for correct option:

d.

Monetary base is comprised of both currencies in circulation along with the bank reserve. It s different from money supply. It can be shown as follows:

  

Therefore, option d is correct.

Explanation for incorrect option:

a.

Currency in circulation is the part that is commonly referred by the money supply and the monetary base. Therefore, option a is incorrect.

b.

Bank reserve alone does not define the monetary base as it also includes the currency in circulation. Therefore, option b is incorrect.

c.

The bank reserve cannot be subtracted from currency in circulation as they both comprise the monetary base. Therefore, option c is incorrect.

e.

The ratio between currency in circulation and the bank reserve does not define the monetary base. Instead ratio of bank reserve to the bank deposits refers to the reserve ratio. Therefore, option e is incorrect.

Economics Concept Introduction

Money multiplier: Money multiplier can be referred as the ratio between money supply and the monetary base.

Monetary base: Monetary base refers to the sum of currency in circulation and the bank reserve. The percentage of currency in circulation is usually higher than the bank reserves.