Question

If the reserve ratio increased from 10 percent to 20 percent, the money multiplier would a. rise from 10 to 20. b. rise from 5 to 10. c. fall from 10 to 5. d. not change.

Answer 1

Answer:

c

Explanation:

Reserve ratio is the percentage of deposits that is required of commercial banks to keep as reserves. The lower the ratio, the higher the increase in money supply

Money multiplier = 1 / reserve requirement

Money multiplier  when reserve ratio is 10% = 1/10 = 0.1 = 10%

Money multiplier  when reserve ratio is 20% =1/20 = 0.05 = 5%

there is a decrease of money multiplier from 5% to 10% when reserve ratio is increased from 10 percent to 20 percent