Question

Assume that banks keep 10% of deposits as reserves. Households hold money such that the currency-deposit ratio is 80%. The money multiplier is given by:________. a. 1.8 b. 2 c. 1.7 d. None of the other answers e. 1.9

Answer 1

Answer:

b. 2

Explanation:

The computation of the money multiplier is shown below:

Money multiplier is

= (1 + currency deposit) ÷ (reserves + currency deposits)

= (1 + 0.80) ÷ (0.10 + 0.80)

= 1.8  ÷ 0.9

= 2

hence, the money multiplier is 2

Therefore the correct option is b. 2

We simply applied the above formula so that the correct value could come

And, the same is to be considered