Question

If reserves decrease by $3 million and the required reserve ratio is 8 percent, what is the change in the money supply? What does the simple deposit multiplier equal?

Answer 1

The change in the money supply is $37.5 million. The simple deposit multiplier equals 12.5.

Step-by-step explanation:

To calculate the change in the money supply, we can use the simple deposit multiplier formula. The simple deposit multiplier (SDM) is calculated as the inverse of the reserve requirement ratio. In this case, the reserve requirement ratio is 8 percent, so the SDM would be 1/0.08, which is 12.5.

Since reserves decreased by $3 million, we can multiply this change by the SDM to find the change in the money supply. So, the change in the money supply would be 3 million multiplied by 12.5, which equals a change of $37.5 million.