If the Fed increases the reserve ratio from 5 percent to 12.5 percent,then the money multiplier
A)decreases from 20 to 8.
B)decreases from 12.5 to 5.
C)increases from 8 to 20.
D)increases from 5 to 12.5.

Question

Quizplus · Accepted Answer

The reserve ratio is the fraction of deposits that banks are required to hold in reserve. The money multiplier is calculated as 1/reserve ratio. Therefore, an increase in the reserve ratio from 5% to 12.5% means that the reserve ratio has doubled. This results in a decrease in the money multiplier from 20 to 8, as the formula for the money multiplier is 1/0.05=20 before the increase and 1/0.125=8 after the increase.

If the Fed Increases the Reserve Ratio from 5 Percent