Macro Unit 4, Question 6- Money Multiplier

The video tutorial explains how banks create money by holding a portion of reserves and loaning out the excess. It introduces the concept of the money multiplier, calculated as one over the reserve requirement, which in this case is 0.1, resulting in a multiplier of 10. The tutorial further discusses open market operations, where the central bank sells bonds to commercial banks, reducing the money supply. This action decreases the money supply by a factor of the multiplier, illustrating the impact of central bank policies on the economy.

What is the primary role of banks in the money creation process?

• To save a portion of reserves and loan out the excess

• To loan out all deposits without holding reserves

• To hold all deposits as reserves

• To create money by printing currency

How is the money multiplier calculated?

• By multiplying the reserve requirement by ten

• By dividing the reserve requirement by one

• By dividing one by the reserve requirement

• By adding the reserve requirement to one

If the reserve requirement is 0.1, what is the money multiplier?

• 1

• 5

• 10

• 20

What happens to the money supply when the central bank sells bonds?

• The money supply increases

• The money supply decreases

• The money supply remains unchanged

• The money supply doubles

In open market operations, what is the effect of the central bank selling $2,000,000 worth of bonds?

• It decreases the money supply by $2,000,000

• It increases the money supply by $20,000,000

• It has no effect on the money supply

• It decreases the money supply by $20,000,000