The banking system has just experienced an increase in deposits of $50,000. The currency drain ratio is 20 percent and the desired reserve ratio is 10 percent. What does the money multiplier equal?
A) 10.00
B) 0.25
C) 3.33
D) 4.00

Question

Quizplus · Accepted Answer

The money multiplier is calculated as 1 divided by the sum of the currency drain ratio and the desired reserve ratio. Here, it is 1 / (0.20 + 0.10) = 1 / 0.30 = 3.33. However, the correct calculation should consider the formula for the money multiplier in the presence of a currency drain, which is 1 / (desired reserve ratio + currency drain ratio * (1 - desired reserve ratio)). This results in 1 / (0.10 + 0.20 * 0.90) = 1 / 0.28 = 3.57, which rounds to approximately 4.00.

The Banking System Has Just Experienced an Increase in Deposits