If the change in reserves in the banking system is $40 million, and the required reserve ratio is 10 percent, then the change in checkable deposits (or the money supply) will be million dollars. The simple deposit multiplier is equal to 1 divided by the . If the simple deposit multiplier is 5, then the required reserve ratio is . The is the interest rate that one bank charges another bank to borrow reserves. A decline in the required reserve ratio and an open market purchase will both increase the money supply. True or false

Question:

1. if the change in reserves in the banking system is $40 million, and the required reserve ratio is 10 percent, then the change in checkable deposits (or the money supply) will be million dollars.

2. The simple deposit multiplier is equal to 1 divided by the.

3. If the simple deposit multiplier is 5, then the required reserve ratio is.

4. The is the interest rate that one bank charges another bank to borrow reserves.

5. A decline in the required reserve ratio and an open market purchase will both increase the money supply. True or false

1. 400 million dollars

2. 1/rr (required reserve ratio)

3. 1/5 = 0.2 = 20%

4. Federal Funds Rate

5. True

Explanation:

1.

The money supply is calculated as

Money supply = deposits*( 1 / required reserve ratio)

Money supply = 40,000,000*( 1/0.10)

Money supply = 400 million

2.

The simple deposit multiplier or also called money multiplier is equal to 1 divided by the required reserve.

DM = 1/rr

3.

The relationship between money multiplier and required reserve is inversely proportional.

MM = 1/rr

5 = 1/rr

rr = 1/5 = 0.20 = 20%

Therefore, the required reserve ratio is 20%

4.

The Federal Funds Rate is the interest rate that one bank charges another bank to borrow reserves.

5.

A decline in the required reserve ratio and an open market purchase will both increase the money supply. True

Since we know that

money supply = deposits*( 1 / required reserve ratio)

The relation between money supply and required reserve ratio is inverse so it is true that a decline in the required reserve ratio will increase the money supply. An open market purchase brings money into the economy and hence increase the money supply.

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a. money supply  

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