The money multiplier equals a. 1/R, where R represents the quantity of reserves in the economy. b. 1/R, where R represents the reserve ratio for all banks in the economy. c. 1 / (1+R), where R represents the quantity of reserves in the economy. d. 1 / (1+R), where R represents the reserve

Question

Ashley Fry

Business

24 May, 11:27

The money multiplier equals a. 1/R, where R represents the quantity of reserves in the economy. b. 1/R, where R represents the reserve ratio for all banks in the economy. c. 1 / (1+R), where R represents the quantity of reserves in the economy. d. 1 / (1+R), where R represents the reserve

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Christine Mccann · Answer 1

B) 1/R, where R represents the reserve ratio for all banks in the economy.

Explanation:

The money multiplier is the coefficient generated by the banks "creating" money.

Banks create money when they lend the money their clients deposit to other clients that need loans. For example, you deposit $100, and the bank will lend another person $75, and that other person purchases goods and the seller of those goods deposits the money on his bank, and that bank loans $40, and the process goes on and on.

That is why the formula for calculating the money multiplier is: 1/r, where r = the reserve ratio. For example, if the reserve ratio is 10%, every extra dollar deposited in a bank should transform into $10 ( = $1 / 10%), the banking system will have created $9 extra.