Macroeconomics: Principles for a Changing World
Macroeconomics: Principles for a Changing World
4th Edition
ISBN: 9781464186929
Author: Eric Chiang
Publisher: Worth Publishers
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Chapter 12, Problem 1QP
To determine

Explain the role of required reserve.

Expert Solution & Answer
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Explanation of Solution

The required reserve creates the banking system a ‘fractional reserve’ and the banks can lend only excess reserves. If the loans are deposited back to the bank, then the banking system can make further excess reserve and offer more loans and so on. The money multiplier can be calculated using the following formula.

Money multiplier=1Reserve requirment

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