# ECONOMICS (CBSE/UGC NET)

## ECONOMICS

### MONETARY POLICY

 Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
If the reserve requirement is 5%, what is the excess reserves on a deposit of \$5, 000? what is the money multiplier?
 A 4750; 20 B 4500; 25 C 4000; 50 D None of the above
Explanation:

Detailed explanation-1: -The Formula for Money Multiplier With a reserve ratio of 5%, a money multiplier of 1/0.05 or 20 is expected. The money multiplier of 20 is expected because if you have deposits of \$1 million and a reserve ratio of 5%, you can then lend out \$20 million.

Detailed explanation-2: -For example, if the required reserve ratio is 20%, the deposit multiplier ratio is (1/0.20) = 5x.

Detailed explanation-3: -Excess Reserves = Total Reserves-Required Reserves For example, suppose a bank has \$20 million in deposits. If its reserve ratio is 10%, then it’s required to keep at least \$2 million on hand. However, if the bank has \$3 million in reserves, then \$1 million of it is in excess reserves.

Detailed explanation-4: -If the reserve requirement is 20 percent, the monetary multiplier will be 4. Excess reserves refer to the: A. difference between a bank’s vault cash and its reserves deposited at the Federal Reserve Bank.

There is 1 question to complete.