Question

Refer to the News Wire to answer two questions.

NEWS WIRE: RESERVE REQUIREMENTS
China Cuts Reserve Requirements
Beijing—China's central bank reduced the amount of reserves commercial banks are required to hold, freeing up money for lending in the latest easing measure to shore up the world's second-largest economy.

The People's Bank of China's percentage point cut in the reserve requirement lowers the reserve-requirement ratio, or RRR, to 11.5 percent for large banks. The move frees up about US$79 billion in additional funds that banks can now lend.

Source: News accounts of March 2020.
Instructions: Round your responses to one decimal place.

What was the money multiplier in China

before the change in reserve requirements?

after the change in reserve requirements?

Answer 1

Before the change in reserve requirements, the money multiplier in China was 8.9. After the change in reserve requirements, the money multiplier in China was 9.8.

Answer 2

Before the change in reserve requirements, the money multiplier in China was approximately 6.7. After the change, it became about 8.7 .

The money multiplier is a measure of the potential increase in the money supply resulting from a change in the reserve requirements.

It is calculated as the reciprocal of the reserve requirement ratio.

Before the Change in Reserve Requirements:

Before the reduction in reserve requirements in China, the reserve-requirement ratio (RRR) was not provided in the given information.

However, assuming a hypothetical initial RRR, let's say 15% as an example, the money multiplier before the change would be calculated as:

Money Multiplier= 1 / Reserve-Requirement Ratio

Money Multiplier before = 1 / 0.15

​ ≈6.7

This means that, hypothetically, for every unit of reserves held, the potential money supply could be expanded by a factor of 6.7 before the change in reserve requirements.

After the Change in Reserve Requirements:

After the reduction in reserve requirements to 11.5%, the new money multiplier would be calculated as:

Money Multiplier after​ = 1/ 0.115

​ ≈8.7

This implies that, following the change, for every unit of reserves held, the potential money supply could be expanded by a factor of 8.7.