Question

Assume that the legally required reserve is 15 percent and commercial banks choose to hold additional excess reserves equal to 5 percent of any newly acquired deposits. Under these circumstances the monetary multiplier for the commercial banking system is:

A. 6.67
B. 5.0
C. 4.0
D. 3.0

Answer 1

B. 5.0

Step-by-step explanation:

Money Multiplier= 1/(Required Reserve Ratio + Excess Reserves)

Money Multiplier= 1/(0.15 + 0.05)

Money Multiplier= 1/0.20

Money Multiplier= 5

Answer 2

The monetary multiplier, in this case, is calculated by adding the legally required reserve of 15 percent to the additional excess reserves of 5 percent, resulting in a total reserve of 20 percent. Using the formula 1/reserve ratio, the monetary multiplier is found to be 5.0. Option B is correct.

Step-by-step explanation:

The student is questioning about the determination of the monetary multiplier in the context of a commercial banking system with a legally required reserve ratio and additional voluntary excess reserves held by banks. To calculate the monetary multiplier, we use the formula 1/reserve ratio, where the reserve ratio includes both the legally required reserve and any excess reserves the banks choose to maintain.

In this case, the legally required reserve is 15 percent and banks choose to hold an additional excess reserve of 5 percent, leading to a total reserve ratio of 20 percent (15% + 5%). Utilizing the formula, the monetary multiplier would be calculated as 1/0.20, which yields a multiplier of 5.0. Therefore, the correct answer is B. 5.0.