If the reserve ratio is 0.08, the simple money multiplier is?
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The correct answer to this question is D. The money multiplier in this case is 12.5. This means that for every dollar that is deposited in a bank in this system, the money supply will go up by $12.50.
The way to find this is by finding the inverse of the required reserve ratio. Here, we are told that the required reserve ratio (how much of its deposits a bank must keep on hand) is .08. To find the multiplier, we use the equation
Multiplier = 1/reserve requirement.
1/.08 = 12.5
Therefore, the money multiplier in this case is 12.5 and D is the correct answer.
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