Use the information below to answer the following question.
Fact 24.7.1
The Bank of Speedy Creek has chosen the following initial balance sheet:

-Refer to Fact 24.7.1. 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)3.3
B)1.25
C)5.0
D)4.0
E)2.7

Question

Use the information below to answer the following question.
Fact 24.7.1
The Bank of Speedy Creek has chosen the following initial balance sheet:
 
-Refer to Fact 24.7.1. 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)3.3 
B)1.25 
C)5.0 
D)4.0 
E)2.7

Quizplus · Accepted Answer

The money multiplier is 1/(desired reserve ratio + currency drain ratio). In this case, the desired reserve ratio is the same for all banks, so the money multiplier is 1/(desired reserve ratio + 0.32) = 1/(desired reserve ratio + 1/3) = 3/(desired reserve ratio + 1). Since all banks have the same desired reserve ratio, the money multiplier is the same for all banks.

Use the Information Below to Answer the Following Question