Question

Calculate the money multiplier if currency = $750 billion, deposits = $500 billion, reserves = $51 billion, and required reserves = $50 billion. (Round to the nearest 2 decimal places.

Answer 1

Currency deposit ratio (k) = 750 / 500 = 1.5

Required reserve ratio (r_r) = 50 / 500 = 0.10

Excess reserve = Reserves - Required reserves = 51 - 50 = $1 billion

Excess reserve ratio (r_e)= 1 / 500 = 0.002

Money multiplier = (1 + k) / (k + r_r + r_e)

                           = (1 + 1.5) / (1.5 + 0.10 + 0.002)

                           = 2.5 / 1.602

                           = 1.56

Thus, the money multiplier is 1.56.