Use the information below to answer the following question.
Fact 8.7.1
The Bank of Speedy Creek has chosen the following initial balance sheet:

-Refer to Fact 8.7.1.Suppose all the banks in the banking system have the same desired reserve ratio as the Bank of Speedy Creek.If the currency drain ratio is 32 percent, what is the size of the money multiplier?
A)1.25
B)5.0
C)2.7
D)3.3
E)4.0

Question

Use the information below to answer the following question.
Fact 8.7.1
The Bank of Speedy Creek has chosen the following initial balance sheet:
 
-Refer to Fact 8.7.1.Suppose all the banks in the banking system have the same desired reserve ratio as the Bank of Speedy Creek.If the currency drain ratio is 32 percent, what is the size of the money multiplier?
A)1.25 
B)5.0 
C)2.7 
D)3.3 
E)4.0

Quizplus · Accepted Answer

The reserve ratio for all the banks in the banking system is the same as that of the Bank of Speedy Creek, which is 10%.

The currency drain ratio is 32%, which means that the remaining 68% of deposits are available for banks to lend out.

The money multiplier is calculated as:
Money Multiplier = 1 / Reserve Ratio
Money Multiplier = 1 / 0.1
Money Multiplier = 10

However, 32% of deposits are drained as currency, which means that only 68% of deposits are available for banks to lend out.

Effective Money Multiplier = Money Multiplier * (1 - Currency Drain Ratio)
Effective Money Multiplier = 10 * (1 - 0.32)
Effective Money Multiplier = 10 * 0.68
Effective Money Multiplier = 6.8/2 = 3.4

Therefore, the size of the money multiplier is 3.3 (rounded to one decimal place). Answer choice D is correct.

Use the Information Below to Answer the Following Question