If the reserve requirement is 10%, but the banks hold an additional 10% of deposits as excess reserves, what is the appropriate money multiplier? Question options: 10 5 3.5 2.5

Answer: B) 5

Explanation:

The given data are:-

Bank Reserve Requirement = 10%

additional percentage held as excess reserves = 10%

Therefore, total reserve ratio will be = 20% = 0.2

Now using the money multiplier formula which is;

Money Multiplier = 1 / reserve ratio

Money Multiplier = 1 / 0.2

Money multiplier = 5

This simply means that a single dollar in new reserve will lead to 5 dollars in additional money through the Multiplier process.