Question

Question 17

Suppose Bank X currently has $50M in demand deposits and $12M in reserves. If all the banks in the economy have the same reserve ratio as Bank X, then the money multiplier in the economy is _____.

A)

2.0

B)

4.2

C)

8.3

D)

none of the above

Question 18

Suppose that in an economy there is $20M of currency in circulation and $40M of reserves in the banking system. If the money multiplier is 7, then the money supply is _____.

A)

$20M

B)

$280M

C)

$420M

D)	none of the above

Answer 1

Answer 17 . Money multiplier in the economy is :

- B. 4.2

Explanation- Money multiplier = 1/ reserve ratio

To calculate money multiplier we have to find out reserve ratio.

A Reserve of $ 12 M hold by bank against deposits of $ 50 M, so the reserve ratio is:

= 12/50 × 100 = 24 %

Money multiplier = 1/RR

= 1/24% = 4.166 or 4.2

Answer 18. If money multiplier is 7, then the money supply is

- B. 280 M

Explanation-

Money supply= excess reserve × money multiplier

= $ 40 M × 7 =$280 M