Topic 4.4 Money Expansion 1.What is the formula for the money multiplier? Multiplier = 1/RR(Reserve Requirement) 2.What is the money multiplier for each of the following reserve requirements? Reserve Requirement10%20%25%33⅓%50% Money Multiplier105432 3.If Harvrinder makes a $100 cash deposit into her checking account when the reserve requirement is 20%, what are the values of the following? Assume banks hold no excess reserves, calculate your answers and show your work. Money initially created from the deposit$100 Maximum loaned out by this single bank$80 Maximum money created in the system$400 Maximum loans created in the system$400 Maximum deposits created in the system$500 4.If the reserve requirement is 10% and the central bank purchases $10 million in government securities on the open market from a bond dealer, what are the values of the following? Assume banks hold no excess reserves, calculate your answers and show your work. Maximum money created in the system9*10 = $90 Million Maximum loans created in the system9*10 = $90 Million Maximum deposits created in the system1/.1 = 10*10 = $100 Million 5.What are two reasons less money will be created than the money multiplier indicates? It assumes banks always loan out excess reserves, money is always redeposited into a bank, and consumers do not hold cash. These assumptions are far from reality leading to less money being created then multiplier indicates.
FAQs
What is the formula for money multiplier macro? ›
The formula for the money multiplier is simply 1/r, where r = the reserve ratio. A little too easy, right? It's the reciprocal of the reserve ratio. When r is the reserve ratio for all banks in an economy, then each dollar of reserves creates 1/r dollars of money in the money supply.
What is the money multiplier AP macro? ›The money multiplier is the amount of money that banks generate with each dollar of excess reserves. The formula for the money multiplier is calculated by dividing the number 1 by the reserve ratio (i.e. reserve requirement).
How to find money supply with money multiplier? ›The formula for money supply is MS = (MB x MM). MB, or monetary base, is the amount of money in circulation or available to be circulated. MM is money multiplier, which is calculated by dividing 1 by the required reserve set by the Federal Reserve.
What is money multiplier in economics pdf? ›•The money multiplier is the relationship. between the reserves in a banking system. and the money supply. The money. multiplier tells you the maximum amount.
How to calculate the multiplier? ›- Determine the marginal propensity of consumption. Calculate the MPC to apply the multiplier formula. ...
- Subtract the MPC from one. ...
- Divide one by the difference. ...
- Evaluate the result.
The maximum amount by which demand deposits can expand is given by the equation: ADD = AER/r. ADD is the expansion of demand deposits, AER is the excess reserves in the banking system, and r is the required reserve ratio.
What is the answer to the money multiplier? ›The money multiplier is the amount of money that the banking system can generate with each dollar of reserves. The money multiplier is calculated by dividing one by the reserve ratio. In other words, the money multiplier is the reciprocal of the reserve ratio.
What is a multiplier macro? ›In economics, a multiplier broadly refers to an economic factor that, when increased or changed, causes increases or changes in many other related economic variables. In terms of gross domestic product, the multiplier effect causes gains in total output to be greater than the change in spending that caused it.
What is money multiplier and its formula? ›Mathematically, money multiplier formula can be represented as follows: Money multiplier = 1/r. Where r = Required reserve ratio or cash reserve ratio. It means that if the reserve ratio is higher, then the money multiplier will be lower and the banks need to keep more reserves.
What is the formula for high powered money and money multiplier? ›Thus the formula, M = mH, tell us how much new money will be created by the banking system for a given increase in the high powered money.
What is the formula for the money multiplier with the monetary base? ›
MB = monetary base = R + C. m1 = M1 money multiplier = M1/MB.
What is the formula for high powered money? ›The use of high-powered money consists of the demand of commercial banks for the legal limit or required reserves with the central bank and excess reserves and the demand of the public for currency. Thus high-powered money H=C+RR+ER where С represents currency, RR the required reserves and ER the excess reserves.
What is an example of a money multiplier? ›If the Federal Reserve raises the monetary base by one dollar, then the money supply rises by 1/f dollars. For example, if the reserve requirement is f = . 10, then the money supply rises by ten dollars, and one says that the money multiplier is ten.
What is another name for money multiplier? ›Money multiplier is also known as credit multiplier or deposit multiplier. The total amount of deposits created by the banking system as a whole as a multiple of the initial increase in the primary deposit is called the credit multiplier.
What is the purpose of the money multiplier? ›The money multiplier is a ratio that measures the potential increase in the money supply for a given cash injection. This cash injection is often the result of an increase in the monetary base by a government or central bank.
What is the formula for the money multiplier for banks? ›Short Answer. The basic formula for the money multiplier (MM) is: M M = 1 R R , where RR represents the reserve ratio as a fraction.
How to calculate money multiplier with MPC? ›- The Spending Multiplier can be calculated from the MPC or the MPS.
- Multiplier = 1/1-MPC or 1/MPS
Exercise. Calculate the M2 money multiplier using the following formula: M2 = 1 + (C/D) + (T/D) + (MMF/D)/[rr + (ER/D) + (C/D)].