Looking at the link below, what would the money multiplier be when the required reserve ratio is 10%?



Question 2c in http://postimage.org/image/npfkaa3uz/

Expert Answers

An illustration of the letter 'A' in a speech bubbles

In this situation, the money multiplier is 10.  This is true no matter how much or how little is deposited in the bank.  So long as the bank only keeps the amount of reserves that it is required to keep, the money multiplier will be 10.

The idea behind the money multiplier is that the bank takes in deposits, holds required reserves, and loans out the rest.  This process is repeated a number of times, allowing the banking system to add much more to the money supply than the original deposit.  To calculate the multiplier, though, we must assume that the bank is not keeping any excess reserves.

If the bank does not keep any excess reserves, the formula for the money multiplier is

Money multiplier = 1/required reserve ratio

In this case, that becomes  

Money multiplier = 1/.10 = 10

Therefore, the multiplier in this case is 10.

See eNotes Ad-Free

Start your 48-hour free trial to get access to more than 30,000 additional guides and more than 350,000 Homework Help questions answered by our experts.

Get 48 Hours Free Access
Approved by eNotes Editorial