If an increase in the monetary base of $8 billion increases the quantity of money by $64 billion, then the money multiplier is equal to______________ .
A) $8 billion
B) $64 billion
C) 1/8
D) 8

Question

Quizplus · Accepted Answer

The money multiplier is the inverse of the reserve requirement ratio. We can use the following formula to calculate the money multiplier:

Money Multiplier = 1 / Reserve Requirement Ratio

We know that an increase in the monetary base of $8 billion increases the quantity of money by $64 billion. This means that the reserve requirement ratio is:

Reserve Requirement Ratio = Monetary Base / Quantity of Money

Reserve Requirement Ratio = $8 billion / $64 billion

Reserve Requirement Ratio = 1 / 8

Therefore, the money multiplier is:

Money Multiplier = 1 / Reserve Requirement Ratio

Money Multiplier = 1 / (1/8)

Money Multiplier = 8

So, the answer is D.

If an Increase in the Monetary Base of $8 Billion