In Zealand, banks' desired reserve ratio is 20 percent and the currency drain also equals 20 percent.
The money multiplier equals .

Question

Quizplus · Accepted Answer

The money multiplier is calculated using the formula 1/required reserve ratio. In this scenario, the required reserve ratio (RRR) is 20%, so the money multiplier is 1/0.20, which equals 5. Therefore, one dollar deposited in the bank can generate up to five dollars in the economy. However, the currency drain also equals 20%, which means that for every dollar deposited in the bank, 20 cents will be withdrawn as currency and not used for further lending. The effective reserve ratio is therefore 20% + (20% x 20%), which equals 24%. The adjusted money multiplier is then 1/0.24, which equals 4.17. Therefore, one dollar deposited in the bank can generate up to 4.17 dollars in the economy. However, the question asks for the money multiplier, not the adjusted money multiplier. To get the money multiplier, we need to take the adjusted money multiplier and multiply it by the currency drain, which is 0.80 (100% - 20%). Therefore, the money multiplier is 4.17 x 0.80, which equals 3.34. Rounded to the nearest tenth, the answer is 3.0.

In Zealand, Banks' Desired Reserve Ratio Is 20 Percent and the Currency