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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The reserve ratio refers to the percentage of deposits that the bank is required to keep in order to efficiently handle customer demands for withdrawals. The money multiplier shows how the money supply is affected by a change in deposits. Usually, when a person deposits money in the bank, the...

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The reserve ratio refers to the percentage of deposits that the bank is required to keep in order to efficiently handle customer demands for withdrawals. The money multiplier shows how the money supply is affected by a change in deposits. Usually, when a person deposits money in the bank, the Federal Reserve demands that the bank keeps a certain percentage of that cash as reserves. The rest of the money can be lent out as loans. That person takes the loan and invests, then brings back their earnings and deposits them in the bank. Over time, the process continues, and the number of deposits grows.

In this case, the formula for finding the simple money multiplier is as follows: 1/reserve ratio

Thus, 1/0.08 = 12.5

Hence, the deposits multiply by 12.5.

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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.

Approved by eNotes Editorial Team