Question

Calculate the value of money multiplier if the legal reserve requirements are 20%.

Answer 1

The money multiplier is the change in the entire supply of money divided by the changes in the monetary base or reserves.

Reserve ratio is the percentage of the deposits which banks keep as financial reserves.

So if the legal reserve requirements are 20% then, the value of money multiplier will be calculated by the formula – Money multiplier = 1 / Reserve Ratio.

So, 1/20= 0.05.