Given an initial deposit of $500,000, and a required reserve ratio of 15%: a) Ca

Question

Given an initial deposit of $500,000, and a required reserve ratio of 15%:

a) Calculate the simple money multiplier:

b) Calculate the total change in the money supple from this deposit:

c) If the required reserve ratio was decreased to 14%, calculate the simple money multiplier:

d) Calculate the total change in the money supple from the deposit based on the new RRR:

e) Is the decrease of the required reserve ratio from 15% to 14% an example of expansionary monetary policy of contractionary monetaary policy? Explain.

Explanation / Answer

(a) Money multiplier = 1/RR = 1/.15 = 6.67

(b) Change in money supply = (1/.15)*500000 = 3333333

(c) Money multiplier = 1/.14 = 7.142857

(d) Change in money supply = (1/.15)*500000 = 3571429

Difference =3571429 - 3333333 =

(e) Yes

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