what is money multiplayer? how will you determine is value? which ratios play an important role in the determination of the value of the money multiplier
Answers
Answer:
Money multiplier is the amount of money that banks generate with each dollar of reserves.Reserve is the amount of deposits that the federal reserve require to hold not lend.It is the ratio of stock of money to the stock of high powered money in an economy.
MONEY MULTIPLIER=
REQUIRED RESERVE RATIO
1
Mm is the money multiplier
M is stock of money
H represents high powered money
Mm=
H
M
The value of multiplier is always geater than 1 , it can also be derived as :
M=C+DD
=(1+cdr)DD
where ,
M= Money supply
C= Currency held by people
cdr= Currency deposit ratio
DD = Demand deposits
High powered money = currency + reserve money
H=C+R
cdrD+rdrD
D(cdr+rdr)
So ,
H
M
=
cdr+rdr
1+cdr
which is > 1
The currency deposit ratio and reserve deposit ratio plays an important role in determing money multiplier.
The cdr is the ratio of money held by public to that they hold in bank deposits.
The rdr is the proportion of total deposits kept by commercial banks as reserve