If the desired reserve ratio is ten percent, currency in circulation is $400 billion, and chequable deposits are $1000 billion, then the money multiplier is approximately ________.

Question

Quizplus · Accepted Answer

To calculate the money multiplier, we use the formula:
Money Multiplier = 1 / Reserve Ratio
Reserve ratio = 10% = 0.1
Currency in circulation = $400 billion
Chequable deposits = $1000 billion
Total deposits = Currency in circulation + Chequable deposits = $1400 billion
Reserves = Required reserves = Reserve ratio x Total deposits = 0.1 x $1400 billion = $140 billion
Money supply = Total deposits / Reserve ratio = $1400 billion / 0.1 = $14,000 billion
Money multiplier = Money supply / Monetary base = $14,000 billion / ($400 billion + $1000 billion) = 2.8. 
Therefore, the best choice is B.

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