Chapter 27, Problem 1CYU

To determine

The money multiplier

Explanation of Solution

The formula for the money multiplier is as follows:

  $\text{Money multiplier = }\frac{\text{1}}{\text{Reserve}\text{Ratio}}$

Hence in the given case:

  $\begin{array}{c}\text{MoneyMultiplier =}\frac{\text{1}}{\text{0}\text{.1}}\\ \text{=10}\end{array}$

Therefore, the effects of $100 million open market purchases will be:

  $\begin{array}{l}\text{= \$100 million × 10}\hfill \\ \text{= \$1 billion }\hfill \end{array}$

Economics Concept Introduction

Introduction:

In simple words, the money multiplier can be understood as the phenomenon that causes credit to be created, which adds money to the economy. Depending on the banking structure of fractional reserve, money is produced in the economy. It is also known as a credit multiplier as well as the monetary multiplier.