Question

Use your knowledge of the money multiplier to explain why the massive increase in bank reserves that began in the 2007-2009 financial crisis has not resulted in uncontrolled inflation.  

Answer 1

Answer - Money multiplier is inversely related to the reserve ratio. The increase in value of reserves will decrease the money multiplier. Inflation is caused by the increased money supply in the economy caused by excessive borrowing from banks. If the banks will keep large amount of reserves with themselves , the reserve ratio will rise. This will lead to lower value of money multiplier. Due to lower multiplier , the money supply will be very slow and hence inflation will not be caused in economy due to lesser increase in total money supply in economy.