ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -The required reserve ratio can be calculated by simply dividing the amount of money a bank is required to hold in reserve by the amount of money it has on deposit. For example, if a bank has $10 million in deposits and $500, 000 are required to be held in reserve, then the required reserve ratio would be 1/20 or 5%.

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: -Given the following, calculate the M1 money multiplier using the formula m 1 = 1 + (C/D)/[rr + (ER/D) + (C/D)]. Once you have m, plug it into the formula MS = m × MB. So if m 1 = 2.6316 and the monetary base increases by $100, 000, the money supply will increase by $263, 160.

Detailed explanation-5: -Money Multiplier = 1/LRR or 1/r Where LRR is the legal reserve ratio. It is the minimum ratio of deposits that is legally required to be kept by the commercial banks of the economy with themselves and with the central bank of India, also known as the RBI.