If $500 of new reserves generates $1000 of new money in the economy,then the money multiplier is
A)2 and the reserve ratio is 50 percent.
B)2 and the reserve ratio is 2 percent.
C)0.5 and the reserve ratio is 50 percent.
D)0.5 and the reserve ratio is 2 percent.

Question

If $500 of new reserves generates $1000 of new money in the economy,then the money multiplier is
A)2 and the reserve ratio is 50 percent.
B)​2 and the reserve ratio is 2 percent.
C)​0.5 and the reserve ratio is 50 percent.
D)​0.5 and the reserve ratio is 2 percent.

Quizplus · Accepted Answer

The money multiplier is the ratio of the change in the money supply to the change in reserves. In this case, the money multiplier is 1000/500 = 2. The reserve ratio is the ratio of reserves to deposits. It can be found by inverting the money multiplier formula, so the reserve ratio is 1/2 or 50%. Choice A is the only option that matches both the money multiplier and the reserve ratio.

If $500 of New Reserves Generates $1000 of New Money