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T/F = Prior to October 2008, the M1 money multiplier was trending downward since...

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lilylee | Student, College Freshman | Salutatorian

Posted July 3, 2013 at 2:03 PM via web

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T/F = Prior to October 2008, the M1 money multiplier was trending downward since required reserve ratio administered by the FED was trending upward.

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justaguide | College Teacher | (Level 2) Distinguished Educator

Posted July 3, 2013 at 2:29 PM (Answer #1)

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The money multiplier is inversely related to the required reserve ratio. As a result as the required reserve ratio tends upwards the money multiplier obviously tends downwards. This follows from the fact that an increase in the required reserve ratio decreases the amount that can be lent out by the banks as credit to customers.

For any amount that is deposited in the banking system the amount of liquidity generated in the economy is reduced with an increase in the required reserve ratio. If a person deposits an amount X, the amount that the bank can lend out is less than X, the decrease in this amount is higher to comply with a higher reserve ratio. The given statement is true.

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