Question

Suppose the Federal Reserve lowers the required reserve ratio from 0.10 to 0.05. How does this affect the simple money multiplier, assuming that excess reserves are held to zero and there are no currency leakages? What are the money multipliers for required reserve ratios of 0.15 and 0.20?

Answer 1

lowered reserve ratio leads to the increase in the money multiplier

for reserve ration = 0.15

money multiplier = 6.667

and for,

reserve ration = 0.20

money multiplier = 5

Step-by-step explanation:

Given:

Initial reserve ration = 0.10

Lowered reserve ratio = 0.05

Now,

the money multiplier is given as :

Money multiplier = 1 / (Reserve ratio)

thus,

for reserve ration = 0.10

money multiplier = 1 / 0.10 = 10

and for

reserve ration = 0.05

money multiplier = 1 / 0.05 = 20

thus,

the lowered reserve ratio leads to the increase in the money multiplier

Now,

for reserve ration = 0.15

money multiplier = 1 / 0.15 = 6.667

and for

reserve ration = 0.20

money multiplier = 1 / 0.20 = 5