Question

Suppose the Federal Reserve increases the amount of reserves by $100 million and the total money supply increases by $500 million. Instructions: Enter your answers as a whole number. a. What is the money multiplier

Answer 1

the money multiplier is 5

Step-by-step explanation:

The computation of the money multiplier is as follows:

As we know that

Increase in money supply = Increase in reserves × Money multiplier

Now after rearranged it the following formula is

Money multiplier = Increase in money supply ÷ Increase in reserves

= $500 million ÷ $100 million

= 5

Hence, the money multiplier is 5