Respuesta :
If the federal reserve increases the amount of reserves by $100 million and the total money supply increases by $600 million a) the money multiplier is 6 and b) using the money multiplier from part a, the money supply change if the federal reserve increases reserves by $60 million is $360 million.
The money multiplier refers to generation of money in the economy in the form of credit creation. It indicates the increase in the money supply and is represented by 1/r where r is the reserve ratio. The reserve ratio, also known as cash reserve ratio, refers to the part of reservable liabilities that commercial banks must hold onto, and not lend out or invest. The requirement is determined by the central bank - United States is the Federal Reserve. It is calculated by dividing the cash reserve requirement by total bank deposits.
a) The reserve ratio from the given information is:
r = 100/600 = 1/6
Hence, the money multiplier is 1/r = 6
b) Considering the money multiplier from part a, the money supply change if the federal reserve increases reserved by $60 million would be 6*60 = 360.
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