Question

Assume that the banking system has total reserves of $100 billion. Assume also that required reserves are 10 percent of checking deposits and that banks hold no excess reserves and households hold no currency. a. What is the money multiplier

Answer 1

1. Money multiplier 10

2. Money supply 1000 billion dollars.

3. change in reserves 500 billion dollars

4. Change in money supply 500 billion dollars

Step-by-step explanation:

1. Calculation to determine the money multiplier

Money multiplier = 1 / 0.1

Money multiplier= 10

2. Calculation to determine The money supply

Money supply =10 x 100 billion dollars

Money supply = 1000 billion dollars.

3. Calculation to determine the change in reserves and the change in the money supply

First step is to calculate the money multiplier w​money multiplier= 1/ 0.20 = 5

Now let calculate the change in reserves

change in reserves = 100 billion dollars x 5

change in reserves = 500 billion dollars

4. Decline in the money supply =1000 billion dollars - 500 billion dollars = 500 billion dollars.