Question

If a country's money supply is $10 million, and there is only one bank where all of the people deposit their money. If the bank holds 5% of the deposits as reserves, what is the money multiplier in this economy?

Answer 1

Answer:

The money multiplier of the economy is 20

Explanation:

Money multiplier is the term of economics which is defined as the maximum amount, the money supply could rise grounded on the increase in the reserve in the system of banking.

The formula used for computing the money multiplier is as:

Money Multiplier = 1 / r

where

r is the reserve ratio that is 5%

So, putting the same value above:

Money Multiplier = 1 / 5%

Money Multiplier = 20