ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The deposit multiplier is the inverse of the reserve requirement ratio. A deposit multiplier minimizes the risk of a bank not having enough cash on hand to satisfy day-to-day withdrawal requests from its customers. Its reserve requirement ratio also determines how much money it has to loan out or otherwise invest.

Detailed explanation-2: -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-3: -The bank’s more money to hold them in reserve, the less they would lend the loans. Thus, the multiplier maintains an inverse relationship with the reserve ratio.

Detailed explanation-4: -The deposit multiplier is the reciprocal of the required reserve ratio. If a bank is required to keep 20% on hand, the deposit multiplier is five. The deposit multiplier represents the maximum amount of money a country could potentially create through bank lending.

Detailed explanation-5: -the money multiplier is 1 f . If the Federal Reserve raises the monetary base by one dollar, then the money supply rises by 1/f dollars. For example, if the reserve requirement is f = . 10, then the money supply rises by ten dollars, and one says that the money multiplier is ten.