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Chapter 15: Q7. (page 320)

If the required reserve ratio is 10 percent, what is the monetary multiplier? If the monetary multiplier is 4, what is the required reserve ratio?

Short Answer

Expert verified

The money multiplier at 10 percent required ratio is 10.

The required reserve ratio is 0.25 when the money multiplier is 4.

Step by step solution

01

Money multiplier 

The money multiplier measures the increase in the supply due to an increase in the quantity of money in the economy:

The money multiplier =k=1rr

Therefore, if the required reserve ratio is 10, then the money multiplier would be:

k=10.1=10

The value of the money multiplier will be 10.

02

Required reserve ratio

If the money multiplier is 4, then the required ratio would be:

4=1rrrr=0.25

The required ratio will be 0.25.

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Most popular questions from this chapter

Why is the banking system in the United States referred to as a fractional banking reserve system? What is the role of deposit insurance in a fractional reserve system?

“Whenever currency is deposited in a commercial bank, cash goes out of circulation and, as a result, the supply of money is reduced”. Do you agree? Explain why or why not.

Does leverage increase the total size of the gain or loss from an investment, or just the percentage rate of return on the part of the investment amount that was not borrowed? How would lowering leverage make the financial system more stable?

Suppose that last year \(30 billion in new loans were extended by banks while \)50 billion in old loans were paid off by borrowers. What happened to the money supply?

  1. Increased.

  2. Decreased.

  3. Stayed the same.

How would a decrease in the reserve requirement affect the (a) size of the monetary multiplier, (b) amount of excess reserves in the banking system, and (c) extent to which the system could expand the money supply through the creation of checkable deposits via loans?
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