Question

Assume that the required reserve ratio is 15 percent and that SAMA sells SR3 million worth of government bonds to a costumer who pays with a check drawn on the Riyad Bank.

we got money supply change by 20,000,0000 .

1. What is the maximum change in the money supply that can result from this sale?

Answer 1

Ans The amount of money that the banking system creates through the practice of fractional reserve banking is a function of 1 divided by the reserve requirement, a quantity known as the money multiplier. In the case given, the money multiplier is 1 6.6666667 15% This equation implies that the smaller the reserve requirement, the greater the money multiplier effect SAMA sells SR3 million worth of government bonds to a costumer who pays with a check drawn on the Riyad Bank. Money supply created will be 3,000,000 Multiplied by Money multiplier 6.666666667 Money supply created will be 20,000,000