Question

If the reserve requirement is 10%, but the banks hold an additional 10% of deposits as excess reserves, what is the appropriate money multiplier? Question options: 10 5 3.5 2.5

Answer 1

The money multiplier is the ratio of the money supply to the monetary base (money in bank vaults and money in circulation). The money multiplier tells us how many additional dollars will be created in the economy for every dollar that is deposited in a bank.

The formula for the money multiplier is:

Money multiplier = 1 / (Required reserve ratio + Excess reserve ratio)

In this case, the required reserve ratio is 10% and the excess reserve ratio is 10%. Therefore, the money multiplier is:

Money multiplier = 1 / (0.10 + 0.10) = 1 / 0.20 = 5

Therefore, the appropriate money multiplier is 5.

Step-by-step explanation:

Answer 2

Answer: B) 5

Explanation:

The given data are:-

Bank Reserve Requirement = 10%

additional percentage held as excess reserves = 10%

Therefore, total reserve ratio will be = 20% = 0.2

Now using the money multiplier formula which is;

Money Multiplier = 1 / reserve ratio

Money Multiplier = 1 / 0.2

Money multiplier = 5

This simply means that a single dollar in new reserve will lead to 5 dollars in additional money through the Multiplier process.