ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -If the reserve ratio was 10%, the deposit multiplier would be 10, and the bank could increase the money supply by $10 for every $1 in reserves.

Detailed explanation-3: -The formula is 1/r, where r is the reserve ratio. In short, it is the reciprocal of r. When r is the reserve ratio for all the banks in an economy, then 1/r is the potential increase in the money supply. As the required reserve minimum goes down, the money multiplier goes up.

Detailed explanation-4: -If the reserve requirement is 10%, the deposit multiplier means that banks must keep 10% of all deposits in reserve, but they can create money and stimulate economic activity by lending out the other 90%. So, if someone deposits $100, the bank must keep $10 in reserve but can lend out $90.

Detailed explanation-5: -What Is the Deposit Multiplier? The deposit multiplier is the maximum amount of money that a bank can create for each unit of money it holds in reserves. The deposit multiplier involves the percentage of the amount on deposit at the bank that can be loaned.