Question

Suppose that the required reserve ratio is 3.00 %. What is the simple money (deposit) multiplier? Round to two decimal places. money multiplier: Increasing the reserve ratio will the money multiplier.

Answer 1

Money Multiplier = 33.33

Explanation:

The formula for the money multiplier is:

Money Multiplier = 1 / Reserve Ratio

where, Reserve Ratio = 3% = 0.03 (given)

So,

Money Multiplier = 1/0.03

Money Multiplier = 33.33

Now, by increasing the reserve ratio, money multiplier will increase or decrease?

We will check money multiplier values on different reserve ratios to know the pattern,

Suppose reserve ratio is 4 %, 5%, ..

Money Multiplier = 1/0.04 = 25

Money Multiplier = 1/0.05 = 20

As we can see by increasing the reserve ratio, money multiplier is decreasing.