South Korea: Bank reserves raised To rein in spending, the Bank of Korea raised

Question

South Korea: Bank reserves raised To rein in spending, the Bank of Korea raised the required reserve ratio to 7 percent from 5 —the first raise in almost 17 years. With higher required reserves, banks will have to cut the amount of loans they make. Source: The New York Times, November 24, 2006 Assuming that the currency drain ratio is zero and that the desired reserve ratio equals the required reserve ratio, calculate the change in the money multiplier that results from the increase in Korea's required reserve ratio.

The money multiplier when the required reserve ratio is 5 percent equals ____. The money multiplier when the required reserve ratio is 7 percent equals _____.

Provide step by step calculations.

Explanation / Answer

Currency drain ratio = 0

Money multiplier = 1 / required reserve ratio

The money multiplier when the required reserve ratio is 5 percent = 1/0.05 = 20

The money multiplier when the required reserve ratio is 7 percent = 1/0.07 = 14.286

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