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.
