If the reserve ratio is 0.08, the simple money multiplier is?a.  1. b.  8. c.  10.5. d.  12.5.

1 Answer

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

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.