Question

If the Federal Reserve Bank wanted to set the money multiplier at mm = 12.5, what reserve ratio should it require? (Use the simple money multiplier for this calculation.) Type an answer and press enter to submit %

Answer 1

The correct answer is 8%.

Step-by-step explanation:

The money multiplier shows the degree of change that can be caused in the money supply due to a change in the deposits. It is calculated as 1/RR or required reserve ratio.

If the Federal reserve bank wants the money multiplier to be 12.5,

Money multiplier =
`(1)/(RR)`

12.5 =
`(1)/(RR)`

RR =
`(1)/(12.5)`

RR = 0.08

So the required reserve ratio should be 8%.