Question

if the change in reserves in the banking system is $40 million, and the required reserve ratio is 10 percent, then the change in checkable deposits (or the money supply) will be million dollars. The simple deposit multiplier is equal to 1 divided by the . If the simple deposit multiplier is 5, then the required reserve ratio is . The is the interest rate that one bank charges another bank to borrow reserves. A decline in the required reserve ratio and an open market purchase will both increase the money supply. True or false

Answer 1

Answer:

True

Explanation:

Answer 2

Question:

1. if the change in reserves in the banking system is $40 million, and the required reserve ratio is 10 percent, then the change in checkable deposits (or the money supply) will be ________ million dollars.

2. The simple deposit multiplier is equal to 1 divided by the_________.

3. If the simple deposit multiplier is 5, then the required reserve ratio is____.

4. The _________is the interest rate that one bank charges another bank to borrow reserves.

5. A decline in the required reserve ratio and an open market purchase will both increase the money supply. True or false

Answer:

1. 400 million dollars

2. 1/rr (required reserve ratio)

3. 1/5 = 0.2 = 20%

4. Federal Funds Rate

5. True

Explanation:

1.

The money supply is calculated as

Money supply = deposits*( 1 / required reserve ratio)

Money supply = 40,000,000*( 1/0.10)

Money supply = 400 million

2.

The simple deposit multiplier or also called money multiplier is equal to 1 divided by the required reserve.

DM = 1/rr

3.

The relationship between money multiplier and required reserve is inversely proportional.

MM = 1/rr

5 = 1/rr

rr = 1/5 = 0.20 = 20%

Therefore, the required reserve ratio is 20%

4.

The Federal Funds Rate is the interest rate that one bank charges another bank to borrow reserves.

5.

A decline in the required reserve ratio and an open market purchase will both increase the money supply. True

Since we know that

money supply = deposits*( 1 / required reserve ratio)

The relation between money supply and required reserve ratio is inverse so it is true that a decline in the required reserve ratio will increase the money supply. An open market purchase brings money into the economy and hence increase the money supply.