For this table, assume that all banks follow the same required reserve ratio requirement. Also assume that the banks are listed in sequential order (thus the loans from the First National Bank become the deposits for the Second National Bank, and the Reference: Ref 15-2 (Table: Multiple Deposit Expansion) For the multiple deposit expansion process described in this table, if all banks hold only the required reserves, what is the money multiplier in this country?
A) 8
B) 10
C) 12.5
D) 5

Question

For this table, assume that all banks follow the same required reserve ratio requirement. Also assume that the banks are listed in sequential order (thus the loans from the First National Bank become the deposits for the Second National Bank, and the  Reference: Ref 15-2 (Table: Multiple Deposit Expansion) For the multiple deposit expansion process described in this table, if all banks hold only the required reserves, what is the money multiplier in this country?
A) 8 
B) 10 
C) 12.5 
D) 5

Quizplus · Accepted Answer

The money multiplier is calculated as 1/required reserve ratio. In this case, the required reserve ratio is not given, but we can find it by subtracting the loans from the deposits for each bank and dividing by the deposits. Doing this for the last bank (Bank F), we get a reserve ratio of 0.2. Therefore, the money multiplier is 1/0.2 = 5. Multiplying this by the initial deposit of $100,000 gives a total increase in the money supply of $500,000.

For This Table, Assume That All Banks Follow the Same