Question 1

In Zealand, banksʹ desired reserve ratio is 20 percent and the currency drain also equals 20 percent. The money multiplier equals_____________ .
A) 5.0
B) 3.0
C) 3.33
D) 2.18

Accepted Answer

The answer of In Zealand, banksʹ desired reserve ratio is...

Question 2

In Zealand, banksʹ desired reserve ratio is 20 percent and there is no currency drain. The money multiplier equals _____________ .
A) 20.0
B) 0.20
C) 0.50
D) 5.0

Accepted Answer

The money multiplier equals the inverse of the reserve requirement ratio. So, in this case, the money multiplier is 1/0.2, which equals 5.0. Therefore, the correct answer is D.

Question 3

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) 3.33
B) 10.00
C) 4.00
D) 0.25

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.

Quiz 8: Money, the Price Level, and Inflation

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

In Zealand, banksʹ desired reserve ratio is 20 percent and there is no currency drain. The money multiplier equals _____________ .

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?