Suppose the currency drain is 25 percent and the desired reserve ratio is 20 percent.The money multiplier equals
A) 4.00.
B) 3.00.
C) 2.78.
D) 2.00.
E) 5.42.

Question

Quizplus · Accepted Answer

The money multiplier formula is: 
Money multiplier = 1/ reserve ratio
In this case, the desired reserve ratio is 20% or 0.2, so the money multiplier would be: 
1/0.2 = 5
However, there is a currency drain of 25%, which means that banks lose 25% of their deposits and cannot lend that out. So, the adjusted money multiplier would be:
5 x (1 - 0.25) = 5 x 0.75 = 3.75
Therefore, the closest option is C, which is 2.78.

Suppose the Currency Drain Is 25 Percent and the Desired