Chapter 25, Problem 6MCQ

To determine

The correct option that is the money multiplier if deposit is $100,000 and reserve is $5,000.

Answer to Problem 6MCQ

Option d is correct.

Explanation of Solution

Explanation for correct option:

d.

Money multiplier is equal to 1/reserve ratio. It can be calculated as follows:

  $\begin{array}{c}\text{Money multiplier}=\frac{1}{\text{Reserve ratio}}\\ =\frac{1}{5\%}\\ =20\end{array}$

Therefore, option d is correct.

Explanation for incorrect option:

Since, it is calculation based, other options are incorrect.

Economics Concept Introduction

Money multiplier: Money multiplier can be referred as the ratio between money supply and the monetary base.

Monetary base: Monetary base refers to the sum of currency in circulation and the bank reserve. The percentage of currency in circulation is usually higher than the bank reserves.