Answer on Macroeconomics Question for Rachel
1. Find the money multiplier and money supply.
2. If the central bank now reduce required reserve to 10 percent of deposits, what will be the changes in reserve, money supply, and money multiplier?
Money multiplier Mm = 1/rr = 1/0.2 = 5
Money supply = total reserves*Mm = 200*5 = $1000 billion.
2.If the central bank now reduce required reserve to 10 percent of deposits, new money multiplier will be Mm = 1/rr = 1/0.1 = 10, new total reserves will be total reserves = money supply/Mm = 1000/10 = $100 billion, money supply will be the same.
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