If $500 of new reserves generates $1000 of new money in the economy, then the money...

If $500 of new reserves generates $1000 of new money in the economy, then the money multiplier is

	a.	2 and the reserve ratio is 2 percent.
	b.	0.5 and the reserve ratio is 50 percent.
	c.	0.5 and the reserve ratio is 2 percent.
	d.	2 and the reserve ratio is 50 percent.

Expert Solution

Money multiplier = 1/ Reserve ratio

It is given in the question that, $500 of new reserves generates $1000 of new money
therefore, The reserve ratio = $500 / $1000 x 100
= 50%

Money multiplier = 1/0.5 ( i.e 50%)
= 2.
So the answer is d) 2 and the reserve ratio is 50%.

Rahul Sunny answered 3 years ago

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