Answer the question on the basis of the following table for a commercial bank or

Question

Answer the question on the basis of the following table for a commercial bank or thrift:

Refer to the table. If the legal reserve ratio falls from 25 percent to 10 percent, excess reserves of this single bank will:

A. Fall by $6,000 and the monetary multiplier will decline from 30 to 10.

B. Rise by $60,000 and the monetary multiplier will increase from 4 to 10.

C. Fall by $2,000 and the monetary multiplier will decline from 10 to 4.

D. Rise by $6,000 and the monetary multiplier will increase from 4 to 10.

(1) (2) (3) Legal Reserve Ratio (%) Checkable Deposits Actual Reserves 10 $40,000 $10,000 20 40,000 10,000 25 40,000 10,000 30 40,000 10,000

Explanation / Answer

The correct option is

B. B. Rise by $60,000 and the monetary multiplier will increase from 4 to 10.

a money multiplier is one of various closely related ratios of commercial bank money to central bank money under a fractional-reserve bankingsystem. If banks lend out close to the maximum allowed by their reserves, then the inequality becomes an approximate equality, and commercial bank money is central bank money times the multiplier. If banks instead lend less than the maximum, accumulating excess reserves, then commercial bank money will be less than central bank money times the theoretical multiplier.

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