this is a question i get from my ecomonic class, but i am not sure about how to do it...can someone help me ?
Given a Federal Reserve requirement of 10%, the simple money multiplier is? 5?10?20?30? how?
thanks!
2006-12-14 07:08:09 · 3 answers · asked by christineohyes 1 in Social Science ➔ Economics
simple money multiplier is 1/Federal Reserve requirement
1/0.1 = 10
How? Money is cash plus bank deposits. If you have $100 in the bank, the bank must reserve $10 and can lend out $90, which they put in someone else's bank account, now they must reserve $9, and can lend out $81that goes into someone else's account.....
The supply of money is $100+90+81+......
2006-12-14 08:20:14 · answer #1 · answered by JuanB 7 · 0⤊ 0⤋
Simple money multipier, is the reciprocal of the required reserve ration, or 1/r; or in other words, the maximum multiple of excess reserves by which the money supply (an increase in bank deposite for instance) can increase. in this case, 1/0.1=10.
See, the simple money multiplier assumes that banks don't hold excess reserves, borrowers don't let funds sit idle, and nobody withdraws cash. Those are the main critiques about this multiplier.
2006-12-14 08:21:24 · answer #2 · answered by Cici Y 1 · 0⤊ 0⤋
well explained
2016-03-29 07:17:23 · answer #3 · answered by Anonymous · 0⤊ 0⤋