There are total money of 3000 in the economy Reserve Ratio i

There are total money of 3000$ in the economy. Reserve Ratio is 5% and the number of banks is infinity. What are Money Multiplier and Total Money Supply in the economy? Explain factors that affect money multiplier in the economy.

Solution

Reserve ratio= 5%

Money multiplayer= 1/reserve ratio

=1/.05

=20

Total Money =$300

Total money supply=money supply*money multiplier

=300*20

=$6000

Money multiplayer=( 1+c)/(r+c+e)

Factors affecting the money multiplier are :

required reserve ratio(r), there is inverse relationship between required reserve and money multiplier.

Currency ratio(c) , currency ratio and money multiplier is negatively related.

Excess reserve ratio(e), excess reserve ratio and money multiplier is also negatively related.