What is the money multiplier? What are the factors that can affect the size of the money multiplier?
The money multiplier shows how much the total supply of money in the economy would be altered if the original quantity of reserves was increased or decreased by $1.The formula to calculate the money multiplier is 1/reserve ratio, where the reserve ratio represents the proportion of deposits that a bank wishes to hold in reserves.
The following factors may affect the size of money multiplier:
The value of the money multiplier will depend on the proportion of reserves that banks hold. The higher the percentage of deposits held by banks as reserves, the lower will be the value of the money multiplier.
The money multiplier also depends on people re-depositing into the banking system the money that they receive. If people instead store their cash in safe-deposit boxes or in shoeboxes hidden in their closets, then banks cannot recirculate the money in the form of loans.
You might also like to view...
The price of a given basket of goods in Richland is 75 ritz. If the same basket of goods cost $10 in the U.S., the price of a basket of goods worth $1 in the U.S. is ________
A) 0.13 ritz B) 1 ritz C) 7.5 ritz D) 1.5 ritz
Give, and explain, an example of conflict between objectives in considering an investment proposal
What will be an ideal response?