#29 If the legal reserve requirement is 10% and the marginal propensity to consume is 80%,...

#29

If the legal reserve requirement is 10% and the marginal propensity to consume is 80%, which is larger?

a. Money multiplier

b. Spending multiplier

c. They are equal

d. Cannot be determined

Answer is A, but why? What exactly, in simpy terms, is money propensity? What concepts do I need to know to be able to get to this answer?

Expert Solution

Money multiplier (simple deposit multiplier) is given by MM = 1/RR = 1/required reserve ratio = 1/10% = 10.

Spending multiplier is given by 1/1-mpc or 1/1 - Marginal propensity to consume = 1/1-80% = 1/20% = 5.

This shows that money multiplier at a value of 10 is greater that the spending multiplier at 5.

Select a. Money multiplier

Rahul Sunny answered 2 years ago

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