The Money Multiplier and Reserve Requirement

Mr. Clifford explains the concept of the money multiplier in monetary policy, illustrating how banks create money by lending out deposits. He provides practice questions to calculate changes in the money supply when the Federal Reserve buys bonds and when an individual makes a bank deposit, emphasizing the role of the reserve ratio in determining the money multiplier.

What is the primary role of banks in the context of monetary policy?

• To print new currency notes

• To hold all deposited money securely

• To create money by lending out deposits

• To invest in foreign currencies

How is the money multiplier calculated?

• By adding the reserve ratio to the total deposits

• By dividing one by the reserve ratio

• By multiplying the reserve ratio by the total deposits

• By dividing the reserve ratio by the total deposits

If the Federal Reserve buys $100 billion in bonds with a reserve requirement of 10%, what is the total increase in the money supply?

• $100 billion

• $500 billion

• $1 trillion

• $10 trillion

When Jill deposits $100 with a reserve requirement of 10%, what is the new money created in the system?

• $900

• $1000

• $1100

• $100

Why is the change in the money supply only $900 when Jill deposits $100?

• Because the bank keeps all the money

• Because the original $100 was already part of the money supply

• Because the reserve requirement is too high

• Because the money multiplier is less than 10