Suppose the currency-to-deposit ratio is 0.3, the excess reserve-to-deposit rati

Question

Suppose the currency-to-deposit ratio is 0.3, the excess reserve-to-deposit ratio is 0.06, and the required reserve ratio is 0.05. Which will have a larger impact on the money multiplier: a rise of 0.05 in the currency ratio or in the excess reserves ratio?

Instructions: Please round your answers to the nearest hundredth (2 decimal places).

Initially, the money multiplier is m = _____ .

If the currency-to-deposit ratio rises to 0.35, the multiplier falls to m = _______.

If, instead, the excess reserve-to-deposit ratio rises, the multiplier will be m = ________.

So, multiplier falls by more with the increase in the (Click to select)

Explanation / Answer

Currency-deposit ratio (Cr) = 0.3

Excess reserve ratio (Er) = 0.06

Required reserve ratio (Rr) = 0.05

Money multiplier = (1 + Cr) / (Rr + Cr + Er)

(a) Initial money multiplier = (1 + 0.3) / (0.05 + 0.3 + 0.06) = 1.3 / 0.41 = 3.17

(b) When Cr = 0.35, Money multiplier = (1 + 0.35) / (0.05 + 0.35 + 0.06) = 1.35 / 0.46 = 2.93

(c) When Er = 0.06 + 0.05 = 0.11, Money multiplier = (1 + 0.3) / (0.05 + 0.3 + 0.11) = 1.3 / 0.46 = 2.83

(d) Multiplier falls by more with increase in the Excess reserve ratio.

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