Question

g If the Fed increases the reserve ratio from 5 percent to 12.5 percent, then the money multiplier Group of answer choices decreases from 20 to 8. decreases from 12.5 to 5. increases from 8 to 20. increases from 5 to 12.5.

Answer 1

Answer:

The answer is A. decreases from 20 to 8

Explanation:

Money multiplier is the amount of money that commercial banks generate with each dollar of their reserves.

The formula is:

1/reserve requirement.

When the reserve requirement was 5 percent, money multiplier will be:

1/0.05 =20

And when the reserve requirement was 12.5 percent, money multiplier will be:

1/0.125 = 8.

Therefore, money multiplier decreases from 20 to 8