Question

If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals _____

Answer 1

Money multiplier = 1 /0.1 = 10

Step-by-step explanation:

The money multiplier or the credit multiplier is the factor that determines the net change in money supply given an increase or decrease in excess reserves of the banks.

Money multiplier = 1 / reserve ratio

Money multiplier = 1 /0.1 = 10

In order to check this we can see the following relation,

Money multiplier * Reserves = Checkable Deposits

10 * 200 = 2000 (2 billion)

This is the right answer.

Hope that helps.