Question

If the reserve ratio decreased from 20 percent to 10 percent, which of the following would happen to the money multiplier?

a. It would rise from 10 to 20.
b. It would rise from 5 to 10.
c. It would fall from 10 to 5.
d. It would fall from 20 to 5.

Answer 1

If the reserve ratio decreases from 20 percent to 10 percent, the money multiplier would rise from 5 to 10.

Step-by-step explanation:

The money multiplier is the reciprocal of the reserve requirement. So if the reserve ratio decreases from 20 percent to 10 percent, the money multiplier would rise from 5 to 10.

This means that for every dollar of reserves, the banking system can create $10 of money through loans and deposits.