Question

The currency drain ratio is 0.2 and the desired reserve ratio is 0.4. What is the money multiplier? The money multiplier is >>> Answer to 1 decimal place.

Answer 1

Answer

Formula :

Money multiplier(m) = M/H

where M = Money supply = C + D where C = Currency, D = Deposit

H = Monetary Base = C + R where C = Currency, R = Desired reserves

=> Money multiplier(m) = M/H = (C + D)/C + R)

=> m = (C/D + 1)/(C/D + R/D)

where C/D = currency drain ratio = 0.2, R/D = Desired reserve ratio = 0.4

=> Money multiplier(m) = (C/D + 1)/(C/D + R/D) = (0.2 + 1)/(0.2 + 0.4) = 2

Hence, The money multiplier is 2.

Answer 2

^ You forgot the decimal place; its 0.02 & 0.04

= 17