If the required reserve ratio is 20 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the effective monetary multiplier for the
Banking system will be

Question

Quizplus · Accepted Answer

The effective monetary multiplier formula is:
Effective Monetary Multiplier = 1 / Required Reserve Ratio

Given, Required Reserve Ratio = 20% = 0.20

As per the question, bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits.

So, the total reserve ratio will be = Required Reserve Ratio + Additional Excess Reserves Ratio
= 0.20 + 0.05
= 0.25

Now, the Effective Monetary Multiplier will be:
Effective Monetary Multiplier = 1 / Required Reserve Ratio
= 1 / 0.25
= 4

Therefore, the effective monetary multiplier for the banking system will be 4.

If the Required Reserve Ratio Is 20 Percent and Commercial