Question

The people in an economy have $10 million in money. There is only one bank that all the people deposit their money in and it holds 5% of the deposits as reserves. What is the money multiplier in this economy?

Answer 1

The answer is 20

Step-by-step explanation:

The money multiplier show us how an initial deposit can lead to a higher final increase in the total money supply or it relates to the maximum amount of bank money that can be created, given a certain amount of money from central bank money.

Money multplier = 1 / reserve requirement

Reserve requirement is 5% of the deposits

Therefore, money multiplier is

1 / 0.05

20