If the required reserve ratio is 2.50 percent, what is the monetary multiplier? if the monetary multiplier is 5, what is the required reserve ratio? percent

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Nikhil Obrien

Business

28 November, 15:43

If the required reserve ratio is 2.50 percent, what is the monetary multiplier? if the monetary multiplier is 5, what is the required reserve ratio? percent

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Emerson Bradley · Answer 1

If the required reserve ratio is 2.50 percent, the monetary multiplier is 40.

The money multiplier gives us the ratio of deposits to reserves (i. e. 1/R). That means, if the reserve ratio is 2.50% (i. e. 0.025), the money multiplier is 40 (i. e. 1/0.025). Thus, an initial deposit of USD 1,000 will end up creating a total of USD 40,000 in new money.

If the monetary multiplier is 5, the required reserve ratio is 20%.

Playing with the original multiplier formula, we can derive that R=1/m (m is money multiplier). If the money multiplier is 5, then the reserve ratio is 20% (i. e. 1/5 or 0.20).