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Posted 2 months ago

Assume that all banks fully loan out excess reserves and all money is redeposited into banks.

If the money multiplier is 4 , what is the reserve requirement?
Choose 1 answer:
(A) 10%10 \%
(B) 50%50 \%
(c) 5%5 \%
(D) 25%25 \%
(E) 20%20 \%
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Answer from Sia
Posted 2 months ago
Solution by Steps
step 1
The money multiplier (MM) is the inverse of the reserve requirement ratio (RRR). The formula for the money multiplier is: MM=1RRR MM = \frac{1}{RRR}
step 2
Given that the money multiplier is 4, we can set up the equation: 4=1RRR 4 = \frac{1}{RRR}
step 3
To find the reserve requirement ratio, we take the reciprocal of the money multiplier: RRR=14 RRR = \frac{1}{4}
step 4
Convert the reserve requirement ratio into a percentage: RRR=14×100%=25% RRR = \frac{1}{4} \times 100\% = 25\%
Key Concept
Money Multiplier and Reserve Requirement Ratio
The reserve requirement ratio is the reciprocal of the money multiplier, and it can be converted into a percentage to find the required reserve percentage for banks.

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