Question

If the reserve ratio increased from 5 percent to 10 percent, then the money multiplier would a. ​rise from 5 to 10. b. ​fall from 10 to 5. c. ​fall from 20 to 10. d. ​rise from 10 to 20.

Answer 1

c. ​fall from 20 to 10.

Step-by-step explanation:

The formula for the money multiplier is 1/reserve ratio,this means that the lower the reserve ratio the higher the multiplier, the reason for this is when the reserve ratio is lower banks can loan out a higher proportion of money therefore more money is created thus the multiplier and reserve ratio have an inverse relationship.

when the reserve ratio is 5% the multiplier is 1/0.05=20

When the reserve ratio is changed to 10% the multiplier is 1/0.1= 10

So the multiplier changes from 20 to 10.