Question

3. Depending on the type of banking system a nation has, when its commercial bank reserves...

3. Depending on the type of banking system a nation has, when its commercial bank reserves increase by $1, that nation’s money supply could increase by more than $1. The rate at which money is created when commercial bank reserves rise is known as the money multiplier. A. Why is the money multiplier is generally greater than 1? In what special case would the money multiplier be equal to 1? B. Suppose the initial money supply is $1,000 and the commercial bank required reserve-deposit ratio is 0.2. What is the money multiplier in this economy? Explain. C. Find the increase in the money supply associated with increases in bank reserves of $10, $50, and $100. Bank reserves increase by $10: Bank reserves increase by $50: Bank reserves increase by $100:

Homework Answers

Answer #2

3.

A.

Money multiplier is generally greater than 1, because most of the economies apply fractional reserves system and in this system, the required reserve ratio is less than 100%.

Further,

Money multiplier = 1/required reserve ratio

So, required reserve ratio is less than 100%, then money multiplier will be greater than 1.

When required reserve ratio is 100%, then money multiplier will be 1.

B.

Money multiplier = 1/RR ratio = 1/.2 = 5

C.

When bank reserve increases by $10,

Increase in money supply = 10*money multiplier = 10*5 = $50

When bank reserve increases by $50,

Increase in money supply = 50*money multiplier = 50*5 = $250

When bank reserve increases by $100,

Increase in money supply = 100*money multiplier = 100*5 = $500

answered by: anonymous
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1.When the Federal Reserve sells securities to a commercial bank the monetary base------ and reserves------- A....
1.When the Federal Reserve sells securities to a commercial bank the monetary base------ and reserves------- A. Remains unchanged; decrease B. Remains unchanged; increase C. Decrease; decrease D. Decrease; remain unchanged 2. If the required reserve ratio is 15 percent, currency in circulation is $400 Billion, checkable deposits are $800 billion, and excess reserves are $0.8 billion , then the M1 multiplier is A. 2.5 B. 1.67 C. 2.3 D. .651 3. If the nonbank public elects to holds more currency...
Suppose a commercial banking system has $ 500,000 of outstanding checkable deposits and actual reserves of...
Suppose a commercial banking system has $ 500,000 of outstanding checkable deposits and actual reserves of 10,000. If the reserve ratio is 0.2%, the banking system can expand the supply of money by a maximum of $ ____. (Put only numbers in your answer; do not put comma in your answer.) Your Answer:
When the Bank of Canada buys government bonds, how do the reserves of the banking system...
When the Bank of Canada buys government bonds, how do the reserves of the banking system change and what happens to the money supply? a. The reserves increase, so the money supply decreases. b. The reserves decrease, so the money supply decreases. c. The reserves increase, so the money supply increases. d. The reserves decrease, so the money supply increases.
In a 100% reserve banking system, what is the money multiplier? A. The money multiplier is...
In a 100% reserve banking system, what is the money multiplier? A. The money multiplier is 1, meaning banks do not impact the money supply B. The money multiplier is 1, meaning banks change the money supply C. The money multiplier is 0, meaning banks do not impact the money supply D. The money multiplier is 0, meaning banks change the money supply A bank has $2 million in reserves and $14 million in loans. These are the bank's only...
QUESTION 28 Suppose that Mellon bank gets a deposit of $5000 and their required reserve ratio...
QUESTION 28 Suppose that Mellon bank gets a deposit of $5000 and their required reserve ratio is 15%. Fill out their T-Account below that results from this deposit. Assets Liabilities Reserves $ Deposits $ Loans $ What is the money multiplier when the required reserve ratio is 15%? (Round to two decimal places) Suppose their required reserve ration falls to 10%. Fill out their T-Account below that results from this change to the required reserve ratio. Assets Liabilities Reserves $...
QUESTION 32 All else equal, if the Fed engages in a repo transaction, then it means...
QUESTION 32 All else equal, if the Fed engages in a repo transaction, then it means the Fed is attempting to decrease the money supply. increase the money supply. foreclose on a failed bank. raise interest rates. QUESTION 33 An expansionary monetary policy is one that reduces the supply of money. True False QUESTION 34 An increase in the legal reserve ratio increases the money supply by increasing excess reserves and increasing the monetary multiplier. decreases the money supply by...
Central Banks System Suppose a banking system with the following balance sheet has no excess reserves....
Central Banks System Suppose a banking system with the following balance sheet has no excess reserves. Assume that banks will make loans in the full amount of any excess reserves that they acquire and will immediately be able to eliminate loans from their portfolio to cover inadequate reserves. Assets Liabilities (in Billions) (in Billions) Tota reserves $150 Transactions accounts $500 Securities $150 Loans $200 Total $500   Total $500 You are required to answer the following Questions: 1) What is the...
i)    Tilaknesia has a reserve ratio of 20% in its banking system. Calculate the simple money multiplier.                     &nbs
i)    Tilaknesia has a reserve ratio of 20% in its banking system. Calculate the simple money multiplier.                                                                               (0.5 marks) On a given day customers deposit $3,300 into their banks. Based on the simple money multiplier calculated in part i), calculate the total amount that the money supply in the banking system will eventually increase to.                       (0.5 marks) Calculate the total amount that the money supply in the banking system will eventually increase to if the reserve ratio decreases to 16%.  Assume the amount of...
In Tivland, currency held by the public is 2,000 niara, bank reserves are 300 niara, and...
In Tivland, currency held by the public is 2,000 niara, bank reserves are 300 niara, and the desired (and current) reserve/deposit ratio is 15 percent. If commercial banks borrow 100 niara in reserves from the Central Bank through discount window lending, then the money supply in Tivland will ________, assuming that the public does not wish to change the amount of currency it holds. A) increase to 3,133 niara B) increase to 4,100 niara C) increase to 4,667 niara D)...
1. Suppose a bank has checkable deposit liabilities of $100,000 and reserves of $42,000. If its...
1. Suppose a bank has checkable deposit liabilities of $100,000 and reserves of $42,000. If its excess reserves is $17,000, what is the reserve ratio? Group of answer choices 0.1 0.15 0.20 0.25 2. The maximum amount of money a bank can lend Group of answer choices must be less than its required reserves. is the difference between its reserves and its required reserves. is the reserve ratio times its checkable deposit liabilities. declines when the Fed decreases the reserve...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT