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16 February, 09:55

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will

a) increase by $1 million.

b) decrease by $1 million.

c) increase by more than $1 million

d) decrease by more than $1 million.

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Answers (2)
  1. 16 February, 13:02
    0
    C) increase by more than $1 million

    Explanation:

    The effect that an increase in the monetary base causes on the money supply is given by: change in monetary base x money multiplier

    the money multiplier is calculated by dividing 1 over the reserve ratio, so if the reserve ration is less than 1, e. g. 0.5, then the money multiplier will = 1 / 0.5 = 2

    Following the example, a $1 million increase in the monetary base will increase the money supply by: $1 million x money multiplier = $1 million x 2 = $2 million.

    Since the reserve ratio is lower than 1, then the money multiplier will always be more than 1 (e. g. reserve ratio = 0.99, money multiplier = 1.01), so any increase in the monetary base will cause a larger increase in the money supply.
  2. 16 February, 13:34
    0
    c) increase by more than $1 million

    Explanation:

    As the required reverve ratio is les than one the banks will lend a portion of the money whihc is deposits. This makes a multiplication of the amount of money which create through a secondary market (loans) Making possible the increase over a millon,

    The reverse ratio goes from zero to one, being one a complete reserve when no loan is possible with the deposits.
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