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Chapter 15: Q11 (page 410)

“The money multiplier is necessarily greater than 1.” Is this statement true, false, or uncertain? Explain your answer

Short Answer

Expert verified

The statement is true.

Step by step solution

01

concept introduction.

The statement is true.

The simple money multiplier is calculated as:

m=1rrm=1rr

Were rrrris the required reserve ratio.

02

Explanation

The simple money multiplier is calculated as:

m=1rrm=1rr

Were rrrris the required reserve ratio.

03

Explanation

The required reserve ratio is the percentage of the total reserves that banks deposit with the Central Bank. Because the required reserve ratio is less than11, then the money multiplier is necessarily greater than 1.

04

Final Answer

The money multiplier is necessarily greater than 1.

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Most popular questions from this chapter

The First National Bank receives an extra $100 of reserves but decides not to lend out any of these reserves. How much deposit creation takes place for the entire banking system?

If reserves in the banking system increase by 1billion because the Fed lends 11billion to financial institutions, and checkable deposits increase by 9billion, why isn’t the banking system in equilibrium? What will continue to happen in the banking system until equilibrium is reached? Show the T-account for the banking system in equilibrium.

Describe how each of the following can affect the money supply:

(a) The central bank

(b) banks

(c) depositors.

Go to the St. Louis Federal Reserve FRED database, and find the most current data available on Currency (CURRNS), Total Checkable Deposits (TCDNS), Total Reserves (RESBALNS), and Required Reserves (RESBALREQ).

  1. Calculate the value of the currency deposit ratio c.
  2. Use RESBALNS and RESBALREQ to calculate the amount of excess reserves, and then calculate the value of the excess reserve ratio e. Be sure the units of total and required reserves are the same when you do the calculations.
  3. Assuming a required reserve ratio rr of 11%, calculate the value of the money multiplier m.

If the Fed buys 1million of bonds from the First National Bank, but an additional 10% of any deposit is held as excess reserves, what is the total increase in checkable deposits? (Hint: Use T-accounts to show what happens at each step of the multiple expansion process.)
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