1. If the reserve requirement

1. If the reserve requirement (rr) is 0.2, what is thesimple deposit multiplier? If, in addition, the currency depositratio (c) is 0.05 and the excess reserve ratio(e) is 0.15, what is the money multiplier? Explain why themoney multiplier differs from the simple deposit multiplier.

Answer:

Reserve Requirement (rr) = 0.2,

the simple deposit multiplier (m) is theinverse of the rr ratio.

It means m = 1 / rr

= 1 / 0.2

= 5.

(m) = 5.

Given, currency deposit ratio (c) = 0.05

Excess reserve ratio (e) = 0.15

reserve requirement (rr) = 0.2

money multiplier = (1 +c)/(c +rr +e)

= (1 +0.05)/(0.05 +0.15+0.2)

= 1.05/0.4

= 2.625.

So money multiplier = 2.625.

The MM has a relationship between the reserves in a bankingsystem and the money supply. The MM discloses to you the maximumamount the supply of money could increase based on an increase inreserves within the whole of the banking system. Be that as it may,the money multiplier contrasts from the more simple depositmultiplier because banks tend to keep excess reserves, and bankclients tend to change over some portion of checkable deposits tocash. Banks usually keep excess reserves past the minimum reserverequirements predetermined by the Governing or Central Bank. Thisactivity decreases the checkable deposits amount and the totalsupply of money that is created.

The simple deposit multiplier gives basis to MM. In any case,the money multiplier value is ultimately less, because of excessreserves, savings and transformations to cash by customers.


 
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