Question

Suppose the currency-to-deposit ratio is 0.25, the excess reserve-to-deposit ratio is 0.05, and the required reserve ratio is 0.10.

1. Which will have a larger impact on the money multiplier: a rise of 0.05 in the currency ratio or in the excess reserve ratio?

2. Initially, the money multiplier is m = _____.

3. If the currency-to-deposit ratio rises to 0.30, the multiplier falls to m = _____.

4. If, instead, the excess reserve-to-deposit ratio rises, the multiplier will be m = _______.

Answer 1

Money multiplier, MM = (1 + Currency-deposit ratio) / (Currency-deposit ratio + Excess reserve ratio + Required Reserve ratio)

(a) Initially,

MM = (1 + 0.25) / (0.25 + 0.05 + 0.10) = 1.25 / 0.4 = 3.125

(b) Currency-deposit ratio = 0.3

MM = (1 + 0.3) / (0.3 + 0.05 + 0.1) = 1.3 / 0.45 = 2.89

(c) Excess reserve ratio rises to which number? MM cannot be computed unless exact number is provided.