Question

Statistics

Posted 2 months ago

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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) $10 \%$
(B) $50 \%$
(c) $5 \%$
(D) $25 \%$
(E) $20 \%$
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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: $MM = \frac{1}{RRR}$

step 2

Given that the money multiplier is 4, we can set up the equation: $4 = \frac{1}{RRR}$

step 3

To find the reserve requirement ratio, we take the reciprocal of the money multiplier: $RRR = \frac{1}{4}$

step 4

Convert the reserve requirement ratio into a percentage: $RRR = \frac{1}{4} \times 100\% = 25\%$

Answer

D

Key Concept

Money Multiplier and Reserve Requirement Ratio

Explanation

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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