Question

1. Assume a 5% required reserve ratio, zero excess reserves, no currency leakage, and a ready loan demand. SAMA buys a SR1 million government bond from investment institution.

1. What is the maximum money multiplier?
2. By how much will total deposits rise?

Answer 1

A)

Money Multiplier tells us how much money supply will change due to change in the reserve requirement.

Money Multiplier = 1/ Reserve Ratio

Given, required reserve ratio = 5%

Money Multiplier = 1/(5/100) = 20

B)

Sama has bought 1 million government bonds, which will lead to a rise in the money supply. But due to the Money multiplier effect, the increase in money supply would be 20 million because the money Multiplier is 20. So Total deposit rise by 20 million.