ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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25
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75
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4
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None of the above
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Detailed explanation-1: -The required reserve ratio is 0.25 when the money multiplier is 4.
Detailed explanation-2: -If the reserve ratio is 25%, then the multiplier = 4.
Detailed explanation-3: -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.
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 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.