The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. The monetary multiplier is
A) 3.00.
B) 4.00.
C) 5.00.
D) 6.67.

Question

The accompanying balance sheet is for the First Federal Bank. Assume the required reserve ratio is 20 percent. The monetary multiplier is
A) 3.00. 
B) 4.00. 
C) 5.00. 
D) 6.67.

Quizplus · Accepted Answer

The monetary multiplier measures the amount by which the money supply is increased by each dollar increase in reserves. It is calculated as 1/required reserve ratio.

In this case, the required reserve ratio is 20 percent, or 0.20. Therefore, the monetary multiplier is:

1/0.20 = 5

So for every $1 increase in reserves, the money supply will increase by $5. Therefore, the correct choice is C.

The Accompanying Balance Sheet Is for the First Federal Bank