Question

If the money multiplier decreased from 20 to 12.5, then

a. the Fed increased the reserve ratio from 5 percent to 8 percent.

b. the Fed increased the fed funds rate from 5 percent to 8 percent.

c. the Fed decreased the reserve ratio from 8 percent to 5 percent.

d. the Fed decreased the fed funds rate from 8 percent to 5 percent.

Answer 1

The correct answer is A

Step-by-step explanation:

Money multiplier is the amount of money which the banks generate with each dollar of the reserves. Reserves is defined as the amount of deposits which the Federal Reserve need the banks to hold or maintain and not lend.

As banking reserves is the ratio where the reserves to the aggregate amount of the deposits.

So, if the money multiplier decrease from 20 to 12.5, them the Fed increase their reserve ratio from 5% to 8%.