In a hypothetical economy, the money supply \( M \) equals 5000 monetary units. In the banking system of this economy, the percentage of reserves available \( rr \) is 10%. Assuming that the commercial banks don't keep any free reserves and the citizens put all their money into bank accounts, if the central bank decides to increase the money supply \( M \) to 6000 monetary units, what will be the level of the Monetary Base \( H \)?

Solve and choose one of the following:

A. 600
B. 1000
C. 60000
D. 6000

The Monetary Base (H) represents the total reserves held by commercial banks plus the currency held by the public. In this scenario, the money supply (M) is increased from 5000 monetary units to 6000 monetary units. To determine the level of the Monetary Base (H), we need to calculate the reserves held by commercial banks.

Given:

Money supply (M) = 5000 monetary units

Reserve requirement ratio (rr) = 10% or 0.10

Reserves held by commercial banks (R) can be calculated using the reserve requirement ratio:

R = M * rr

R = 5000 * 0.10

R = 500 monetary units

Now, let's calculate the new level of the Monetary Base (H) after the money supply is increased to 6000 monetary units:

New Monetary Base (H) = Reserves held by commercial banks (R) + Currency held by the public

Since the citizens put all their money into bank accounts and the commercial banks don't keep any free reserves, the currency held by the public will be equal to zero.

New Monetary Base (H) = 500 + 0

New Monetary Base (H) = 500 monetary units

Therefore, the correct answer is a. 500. The level of the Monetary Base (H) after the increase in the money supply is 500 monetary units.

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