Question

The money multiplier formula _____.


determines the amount of funds loaned by the Federal Reserve Bank to its members


is used by the Board of Governors to decide interest rate cuts


determines the amount of new money that will be created with each demand deposit


is used by the Fed to determine the amount of currency in the economy

Answer 1

The money multiplier formula tells us the ratio of increase or decrease in the money supply that banks should generate corresponding to each dollar of reserves. This also tells the maximum amount the money supply could increase based on an increase in reserves within the banking system. The answer to this item is letter C. 

Answer 2

determines the amount of new money that will be created with each demand deposit