Exit Ticket Monetary multiplier

What does the Monetary Multiplier measure in an economy?

• The speed at which money changes hands

• The total amount of deposits created from an initial deposit

• The amount of reserves a bank must hold against deposits

• The interest rate set by the central bank

Which of the following formulas represents the Monetary Multiplier?

• 1 / Reserve Ratio

• Reserve Ratio / Money Supply

• Money Supply × Interest Rate

• Interest Rate / Reserve Ratio

If a bank has a reserve requirement of 20%, what is the Monetary Multiplier?

• 4

• 5

• 10

• 20

Why is the Monetary Multiplier important in monetary policy?

• It determines the amount of physical currency in circulation

• It affects the money supply, impacting inflation and economic growth

• It only influences the interest rate charged by banks

• It stabilizes exchange rates in the foreign currency market

If a bank receives a deposit of $500 and the reserve ratio is 8%, how much could this deposit potentially increase the total money supply, assuming full application of the monetary multiplier? Show your calculations.

Answer explanation

With a reserve ratio of 8%, the monetary multiplier is 1/0.08 = 12.5. Thus, a $500 deposit can increase the money supply by $500 x 12.5 = $6250.