If the reserve ratio increased from 5 percent to 10 percent, then the money multiplier would a. rise from 5 to 10. b. fall from 10 to 5. c. fall from 20 to 10. d. rise from 10 to 20.

Question

Alannah

Business

14 October, 10:15

If the reserve ratio increased from 5 percent to 10 percent, then the money multiplier would a. rise from 5 to 10. b. fall from 10 to 5. c. fall from 20 to 10. d. rise from 10 to 20.

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Answers (1)

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Lilliana Carlson · Answer 1

c. fall from 20 to 10.

Explanation:

The formula for the money multiplier is 1/reserve ratio, this means that the lower the reserve ratio the higher the multiplier, the reason for this is when the reserve ratio is lower banks can loan out a higher proportion of money therefore more money is created thus the multiplier and reserve ratio have an inverse relationship.

when the reserve ratio is 5% the multiplier is 1/0.05=20

When the reserve ratio is changed to 10% the multiplier is 1/0.1 = 10

So the multiplier changes from 20 to 10.