ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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.

Detailed explanation-2: -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-3: -When the legal reserve ratio is 10 percent, the money-creating potential of this single bank is: $6, 000. The reserve ratio refers to the ratio of a bank’s: required reserves to its checkable-deposit liabilities.

Detailed explanation-4: -These changes can lead to increase in money supply. For example, assume the entire banking system has $1000 in deposits and the required reserve ratio is 10% and banks are fully loaned up. That means the total reserve in the banking system is $100.