Suppose the currency-to-deposit ratio is 0.2, the excess reserve-to-deposit rati

Question

Suppose the currency-to-deposit ratio is 0.2, the excess reserve-to-deposit ratio is 0.05, and the required reserve ratio is 0.1. Which will have a larger impact on the money multiplier: a rise of 0.05 in the currency ratio or in the excess reserves ratio?

Initially, the money multiplier is m = ________.

If the currency-to-deposit ratio rises to 0.25, the multiplier falls to m = _______.

If, instead, the excess reserve-to-deposit ratio rises, the multiplier will be m = ________.

So, multiplier falls by more with the increase in the excess reserve ration or currency ratio?

Please round answers to the nearest hundredth (2 decimal places). If possible, please explain the calculation.

Explanation / Answer

* A rise of 0.05 in the currency ratio will have a larger impact on money multiplier.

* Initial money multiplier:

Multiplier (m) = (cr + 1) / (cr + rr)

m = (0.2 + 1) / (0.2 + 0.1)

m = 1.2 / 0.3 = 4.

Initially, the money multiplier is m = 4..

* If currency-to-deposit ratio rises to 0.25:

m* = (0.25 + 1) / (0.25 + 0.1)

m* = 1.25 / 0.6 = 3.57

If currency-to-deposit ratio rises to 0.25, the multiplier falls to m = 3.57.

* multiplier falls by more with the increase in the currency ratio.

*****

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