If the desired reserve ratio is five percent, currency in circulation is $400 billion, and chequable deposits are $800 billion, then the money multiplier is approximately ________.

Question

Quizplus · Accepted Answer

The formula for the money multiplier is 1/reserve ratio. So, the reserve ratio is 0.05 (or 5%), the currency in circulation is not relevant to the calculation, and the total deposits are $800 billion. Thus, the money multiplier is 1/0.05 = 20. Dividing $800 billion by the money multiplier of 20 gives us $40 billion, which is the amount of required reserves. Therefore, the initial deposit that led to the creation of $1 of money supply is $40 billion. To get the inverse, we divide 1 by $40 billion, which gives us approximately 0.000000025. Multiplying by 100 gives us the percentage value, which is 0.0000025%. Converting to a simplified fraction gives us 1/2.72, which is approximately 0.367. So, the money multiplier is approximately 2.72.

If the Desired Reserve Ratio Is Five Percent, Currency in Circulation