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If the reserve ratio is 0.08, the simple money multiplier is?a.  1. b.  8. c. ...

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Mizdee | Student, Undergraduate | Valedictorian

Posted October 15, 2012 at 3:25 AM via web

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If the reserve ratio is 0.08, the simple money multiplier is?

a.  1.

b.  8.

c.  10.5.

d.  12.5.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted October 15, 2012 at 3:33 AM (Answer #1)

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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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