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Chapter 15: Q. 17 (page 347)

Suppose that the value of the potential money multiplier is equal to 4 . What is the reserve ratio?

Short Answer

Expert verified

As a result, the reserve ratio 0.25 or25%

Step by step solution

01

Definition of reserve ratio

The reserve ratio is the percentage of reservable liabilities that commercial banks must keep rather than investing or lending. It is an essential instrument of monetary policy in an economy, and it helps to regulate the money supply. When the central bank wishes to expand the money supply of the economy, it reduces the reserve ratio. The commercial banks would thus have more cash to lend out.

02

Step2:Find reserve ratio

The following expression can be used to calculate the reserve ratio:

Potential money multiplier=1reserveratio

Given: Potential money multiplier is 4.

Substituting the value in the preceding expression yields:

4=1Reserve ratio

Reserve ratio =14

=0.25

As a result, the reserve ratio0.25or 25%

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Most popular questions from this chapter

In Problem 15-24, what would be the amount of the potential money multiplier that applies to a 100,000$ decrease in reserves caused by a Fed open market sale of that amount? How much would the money supply potentially decrease as a result of this sale?

Describe the basic structure and functions of the Federal Reserve System.

Determine the maximum potential extent that the money supply will change following a Federal Reserve monetary policy action.

Take a look at Figure 15-5. Suppose that the Federal Reserve's focus on monetary policymaking shifted away from buying and selling U.S.government securities to utilizing the discount rate or the interest rate paid on bank reserves as the Fed's main policy instrument. If so, would the Federal Open Market Committee necessarily remain the Fed's key policymaking group?

Why do you suppose that European banks that are issuing new adjustable-rate mortgage loans now add a larger intermediation charae to the Euribor to determine the loan fate?
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