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?

Question

Quizplus · Accepted Answer

- The currency drain ratio is 20%, meaning that 20% of deposits will be held as currency and not deposited in the bank. Therefore, the initial deposit of $50,000 will result in an increase in bank reserves of $40,000 (80% of $50,000).
- The desired reserve ratio is 10%, meaning that banks will hold 10% of their deposits as required reserves and lend out the remaining 90%. Therefore, the initial deposit of $50,000 will result in an increase in the money supply of $360,000 (9 times the initial increase in bank reserves of $40,000).
- The money multiplier is the ratio of the change in the money supply to the initial change in bank reserves, so the money multiplier in this case is 360,000 / 40,000 = 9.
- The closest choice to 9 is C, 4.00, but this is not the correct answer as it is too low. The correct answer is A, 3.33, which is not listed as a choice.

The Banking System Has Just Experienced an Increase in Deposits