Question

If the Fed increased the reserve requirement from 20 percent to 25 percent, a deficiency of reserves in the commercial banking system of _________ would occur and the monetary multiplier would fall to ________.
a. $50 billion; 5
b. $10 billion; 4
c. $50 billion; 4
d. $10 billion; 8

Answer 1

Answer:

c. $50 billion; 4

Explanation:

On the basis of Question provided in ask for details:

Solution is

Monetary multiplier = 1/reserve ratio

Monetary multiplier = 1/0.2 = 5

If the Fed increased the reserve requirement from 20 percent to 25 percent

New reserve based on 25 % requirement =(200 billion/20%)/25%= 250 billion

Deficiency of reserves = 250 billion - 200 billion = 50 billion

Monetary multiplier = 1/reserve ratio

Monetary multiplier = 1/0.25 = 4