Table 29-4

-Refer to Table 29-4. Assume there is a reserve requirement and the Bank of Cheerton is exactly in compliance with that requirement. Assume the same is true for all other banks. Lastly, assume people hold only deposits and no currency. What is the money multiplier?
A)11.5
B)12.5
C)9.1
D)8.1

Question

Table 29-4
  ​
-Refer to Table 29-4. Assume there is a reserve requirement and the Bank of Cheerton is exactly in compliance with that requirement. Assume the same is true for all other banks. Lastly, assume people hold only deposits and no currency. What is the money multiplier?
A)11.5 
B)12.5 
C)9.1 
D)8.1

Quizplus · Accepted Answer

The money multiplier is the reciprocal of the reserve requirement. If the Bank of Cheerton is exactly in compliance with the reserve requirement, and assuming all other banks are as well, and that people hold only deposits and no currency, the reserve requirement can be calculated as 1 divided by the reserve ratio. Without the specific reserve ratio provided in the question, we typically use the formula for the money multiplier: 1 / Reserve Requirement. Given the choices, the correct answer implies a reserve requirement of 8% (since 1 / 0.08 = 12.5), which matches choice B.

Table 29-4 ​

Table 29-4