Question

1. If loans are $80,000, excess reserves are $2,500, and checkable deposits are $100,000, then the money multiplier must be ______.

   	A.	17.5
   	B.	5.7
   	C.	2.5
   	D.	5.4
   	E.	none of the above

Answer 1

Solution :-

Money multiplier is the inverse of required reserve ratio, r

The checkable deposits can be broken used in three ways: the amount kept aside as required reserves, voluntary excess reserves and the remaining amount given out as loans. Thus, we have

$100,000 = required reserves +$2500 + $80,000

Required reserves = 10000 - 80000 - 2500 = $17,500

Also, required reserves = required reserves ratio*checkable deposits

17,500 = r*100,000

r = 17,500/100,000 = 0.175 %

Hence, money multiplier, m = 1/r

m = 1/0.175 = 5.714 or 5.7

Thus , the money multiplier is equal to 5.7

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