Question

The initial money supply is $1,500, of which $700 is currency held by the public. The desired reserve-deposit ratio is 01. Calculate increase in the money supply associated with increases in bank reserves of $50. What is the money multiplier in Assume that individuals do not change their currency holdings.

Instructions: Enter your responses as whole numbers.
Increase in bank reserves Increase in money supply
$50 $_______
Money multiplier: _____


A general rule for calculating the money multiplier is:
A. 1/desired reserve
B. 1/deposit ratio.
C. 1/(deposit ratio-desired reserve)
D. 1/(desired reserve-deposit ratio).

Answer 1

The increase in the money supply with an increase in bank reserves of $50 and a reserve ratio of 0.1 is $500. The money multiplier is calculated as 10, using the formula 1 divided by the reserve ratio. Option A is correct.

Step-by-step explanation:

To calculate the increase in the money supply associated with an increase in bank reserves of $50, we must first determine the money multiplier.

The money multiplier formula is 1 divided by the reserve ratio. In this case, the desired reserve-deposit ratio is 0.1 (which is the same as the reserve ratio), hence the money multiplier will be 1/0.1 = 10.

Now, we multiply the increase in bank reserves ($50) by the money multiplier (10) to get the increase in the money supply. So, the increase in the money supply would be $50 * 10 = $500.

For the multiple-choice question about the general rule for calculating the money multiplier, the correct answer is A. 1/desired reserve as it represents the reciprocal of the desired reserve ratio.