Answer:
To calculate the effect of the bank's ability to create money with a decrease in reserve ratio.
Given:
New deposits= $2000, Reserve ratio= 10 percent
To calculate the money multiplier= 1/10%= 1/0.1= 10
To calculate the money that was created we multiply the multiplier by the new deposits.
Therefore: 10*2000= $20,000
To calculate the amount created when the reserve ratio is 5%
To calculate the money multiplier= 1/5%= 1/0.05= 20
Therefore the money created will be 20*2000= $40,000
Based on $20000 extra gained, a decrease in the reserve ratio to 5% will lead to an increase in the capacity f the bank to make more money.
Explanation:
To calculate the effect of the bank's ability to create money with a decrease in reserve ratio.
Given:
New deposits= $2000, Reserve ratio= 10 percent
To calculate the money multiplier= 1/10%= 1/0.1= 10
To calculate the money that was created we multiply the multiplier by the new deposits.
Therefore: 10*2000= $20,000
To calculate the amount created when the reserve ratio is 5%
To calculate the money multiplier= 1/5%= 1/0.05= 20
Therefore the money created will be 20*2000= $40,000
Based on $20000 extra gained, a decrease in the reserve ratio to 5% will lead to an increase in the capacity f the bank to make more money.
