Question

How is the money multiplier and the monetary base related?

How is the money multiplier and the monetary base related?

Homework Answers

Answer #1

Given a value of monetary base, total money supply (stock of money) in the economy at a point of time is the product of money multiplier and monetary base. So

Money supply = Money multiplier x Monetary base

Therefore,

Money multiplier = Money supply / Monetary base, and

Monetary base = Money supply / Money multiplier.

Money supply remaining unchanged, the higher (lower) the monetary base, the lower (higher) the money multiplier, and the higher (lower) the money multiplier, the lower (higher) the monetary base.

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