Assuming initially that r = 10 percent and c = 40 percent, an increase in r to 15 percent causes ________.

Question

Quizplus · Accepted Answer

The money multiplier is calculated as 1/c, which in this case is initially 2.5. An increase in r to 15 percent causes a decrease in the money multiplier as banks will hold onto more reserves and lend out less. Using the formula, the new money multiplier would be 1/0.4 = 2.5/1.15 ≈ 2.17. However, none of the options given match this exact value, so we must choose the closest option, which is B, where the money multiplier decreases from 2.8 to 2.55.

Assuming Initially That R = 10 Percent and C =