ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -Money Multiplier = 1/LRR is the relation between LRR and money multiplier.

Detailed explanation-3: -A one-dollar increase in the monetary base causes the money supply to increase by more than one dollar. The increase in the money supply is the money multiplier. Money is either currency held by the public or bank deposits: M =C+D.

Detailed explanation-4: -Given the following, calculate the M1 money multiplier using the formula m 1 = 1 + (C/D)/[rr + (ER/D) + (C/D)]. Once you have m, plug it into the formula MS = m × MB. So if m 1 = 2.6316 and the monetary base increases by $100, 000, the money supply will increase by $263, 160.

Detailed explanation-5: -Money multiplier is the process by which the commercial banks create credit, based upon the reserve ratio and initial deposits.