Suppose the currency-to-deposit ratio is 0.25, the excess reserve-to-deposit rat

Question

Suppose the currency-to-deposit ratio is 0.25, the excess reserve-to-deposit ratio is 0.04, 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 0.3, 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) excess reserve ratiocurrency ratio.

Explanation / Answer

currency-to-deposit ratio is 0.25

the excess reserve-to-deposit ratio is 0.04

the required reserve ratio is 0.05

Initially, the money multiplier is m =3.676

If the currency-to-deposit ratio rises to 0.3, the multiplier falls to m = 1.44

If, instead, the excess reserve-to-deposit ratio rises, the multiplier will be m =3.20

So, multiplier falls by more with the increase in the currency ratio.

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