The smaller the simple deposit multiplier (money multiplier), Question 5 options
ID: 1225792 • Letter: T
Question
The smaller the simple deposit multiplier (money multiplier), Question 5 options:
the smaller the required-reserve ratio.
the larger the required-reserve ratio.
the less likely the Fed will be to use its monetary policy tools.
the smaller the change in the money supply for a given change in deposits.
Assume there are no excess reserves in the banking system initially, the required reserve ratio is 16.7% (or 1/6), and the Federal Reserve buys $100,000 worth of government securities in the open market. As a result of this action by the Fed, the M1 measure of the money supply can ultimately
Question 6 options:
decrease by up to $600,000.
increase by up to $600,000.
increase by up to $100,000.
decrease by up to $100,000.
increase by $83,333.
decrease by up to $600,000.
increase by up to $600,000.
increase by up to $100,000.
decrease by up to $100,000.
increase by $83,333.
Explanation / Answer
5. Option B is correct.
Simple deposit multiplier = 1/ rr
Where rr is the required reserve.
As the rr increases, the multiplier would decrease.
6. Out of $100,000 infused into the economy, 16.7% is the rr, so multiplier = 1/16.7% * $100,000
Multiplier = 5.98 * 100,000
Multiplier = $598802.39 ~ 600000
Thus option B is correct.
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