According to the “World View” below, World View: China Cuts Reserve Requirements

Question

According to the “World View” below, World View: China Cuts Reserve Requirements With its vast economy showing signs of slower growth, China has opted to encourage more bank lending. China’s central bank, the People’s Bank of China, said it is trimming the required reserve ratio for its banks by half a percentage point—to 19.5 percent, down from 20 percent. The lower reserve requirement enables banks to lend more of their reserves. The move is expected to free up about $16 billion in bank reserves. Source: News reports, June 8-10, 2014.

What was the money multiplier in China:

(a) Before the rate cut? Instructions: Enter your response rounded to the nearest whole number.

Money multiplier:

(b) After the rate cut? Instructions: Enter your response rounded to two decimal places.

Money multiplier:

Explanation / Answer

Money Multiplier is calculate as follows -

Money multiplier = 1/Required reserve ratio

(a) Before rate cut,

Required reserve ratio = 20 percent or 0.20

Money multiplier = 1/Required reserve ratio = 1/0.20 = 5

The value of multiplier before rate cut is 5.

(b) After rate cut,

Required reserve ratio = 19.5 percent or 0.195

Money multiplier = 1/Required reserve ratio = 1/0.195 = 5.13

The value of multiplier after rate cut is 5.13

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