A central bank raised the reserve requirement ratio from 10 percent to 12 percent. Other things the same, how does the money multiplier change?
A)It increases by 1.67.
B)It decreases by 1.67.
C)It increases by about 2.
D)It decreases by 2.

Question

Quizplus · Accepted Answer

The money multiplier is the reciprocal of the reserve requirement ratio. Therefore, if the reserve requirement ratio increases from 10% to 12%, the money multiplier must decrease from 10 to 8.33 (1/0.12 = 8.33). This represents a decrease of 1.67 (10 - 8.33 = 1.67), so the correct choice is B.

A Central Bank Raised the Reserve Requirement Ratio from 10