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 $0.5 million as required reserves. What is the money multiplier in this economy?

a. 1
b. 5
c. 10
d. 20

Answer 1

Answer: d. 20

Step-by-step explanation:

The Money multiplier is the number that new deposits are multiplied with to find out their total effect on the banking system.

It is calculated by dividing 1 by the required reserve ratio.

Required reserve ratio = 0.5/10

= 5%

Money Multiplier = 1/5%

= 20