ECONOMICS
MONEY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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$400 in money creation.
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$100 in money creation.
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$400 in money destruction.
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$100 in money destruction.
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Detailed explanation-1: -The required reserve ratio is 0.25 when the money multiplier is 4.
Detailed explanation-2: -With a ratio of 100% this means that even if every single customer demanded to take out their money, the bank will have it all available. This is clearly a very safe form of banking, but as described so far, the bank would simply be acting like a safe deposit box. It would not be able to make any loans.
Detailed explanation-3: -What happens to the money multiplier when the reserve requirement increases from 20% to 25%? It decreases from 5 to 4.
Detailed explanation-4: -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%.