ECONOMICS (CBSE/UGC NET)

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.