ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -If the reserve requirement is 10%, then the money supply reserve multiplier is 10 and the money supply should be 10 times reserves. When a reserve requirement is 10%, this also means that a bank can lend 90% of its deposits.

Detailed explanation-2: -If the reserve ratio was 10%, the deposit multiplier would be 10, and the bank could increase the money supply by $10 for every $1 in reserves.

Detailed explanation-3: -A one-dollar increase in the monetary base causes the money supply to increase by more than one dollar. The increase in the money supply is the money multiplier. Money is either currency held by the public or bank deposits: M =C+D.

Detailed explanation-4: -The money multiplier formula is simply 1/r where r is the reserve ratio. This means that the smaller r is, the bigger the money multiplier is. Alternately, as r gets bigger, the money multiplier gets smaller, meaning there is less money supply in the economy.

Detailed explanation-5: -The deposit multiplier is the inverse of the reserve requirement ratio. For example, if the bank has a 20% reserve ratio, then the deposit multiplier is 5, meaning a bank’s total amount of checkable deposits cannot exceed an amount equal to five times its reserves.