Question

30) Assuming initially that the required reserve ratio = 15%, the currency-deposit ratio = 40%, and the excess reserve ratio = 5%, a decrease in the excess reserve ratio to 0% causes the MI money multiplier to everything else held constant. A) increase from 1.67 to 1.82 10 .11 B ) decrease from 1.82 to 1.67 C) decrease from 2.55 to 2.33 to D) increase from 2.33 to 2.55

Answer 1

Question 30

Required reserve ratio, rr = 15% or 0.15

Currency deposit ratio, C = 40% or 0.40

Excess reserve ratio, er = 5% or 0.05

Calculate the M1 money multiplier -

M1 money multiplier = (1+C)/(C+rr+er)

M1 money multiplier = (1+0.40)/(0.40+0.15+0.05) = 1.40/0.60 = 2.33

The M1 money multiplier is 2.33

Now, excess reserve ratio decreases by 0%.

Calculate M1 money multiplier -

M1

money multiplier = (1+C)/(C+rr+er)

M1 money multiplier = (1+0.40)/(0.40+0.15+0) = 1.40/0.55 = 2.55

The M1 money multiplier is 2.55

So,

The M1 money multiplier has increased from 2.33 to 2.55

Hence, the correct answer is the option (D)

Note -: As HOMEWORKLIB Answering Policy, when more than 1 question is posted, 1st question is answered with complete explanation.