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20 May, 19:50

If the reserve requirement is 20% and commercial bankers decide to hold additional excess reserves equal to 5% of any newly acquired checkable deposits, then the effective monetary multiplier for the banking system will be:

a. 3

b. 4

c. 5

d. 6

+5
Answers (1)
  1. 20 May, 20:09
    0
    B) 4

    Explanation:

    the monetary multiplier before this newly acquired checkable deposit was 1 / required reserve ratio = 1 / 20% = 5. Since the banks decided to increase the reserve ration to 25%, then the money multiplier will decrease to 1 / 25% = 4.

    The monetary multiplier shows the money creating effect of the fractional banking system. E. g. you deposit $1,000 at bank A. Bank A will lend $750 to Bill. Bill then purchases a bike from Tom and Tom deposits the $750 in bank B. Bank B will then lend $562.50 to Sarah. Sarah purchases a TV from Alex, and Alex deposits the money in bank C. Then bank C will lend $421 to Frank, and the cycle goes on.
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