17.07.2022 - 08:47

Suppose you have deposited $5000 currency into your savings account at a branch of MBC bank. If the reserve ratio for this country is 0.08, how much money in total can this $5000 create in the money market? a. $57,500 b. $45,000 c. $50,000 d. $62,500

Question:

Suppose you have deposited $5000 currency into your savings account at a branch of MBC bank. If the reserve ratio for this country is 0.08, how much money in total can this $5000 create in the money market?

a. $57,500
b. $45,000
c. $50,000
d. $62,500

Answers (1)
  • Frank
    April 2, 2023 в 06:17
    The answer is option A, $57,500. The reserve ratio is the percentage of deposits that banks are required to hold in reserve and not lend out. In this case, the reserve ratio is 0.08, meaning that the bank must hold 8% of the $5000 deposit in reserve, which is $400. The remaining $4600 can be loaned out, and since banks operate on a fraction-reserve banking system, that $4600 can actually create more money. The total amount of money that can be created is determined by the money multiplier, which is the reciprocal of the reserve ratio. In this case, the money multiplier would be 1/0.08, or 12.5. Multiplying the $4600 by this money multiplier gives us $57,500, which is the total amount of money that can be created in the money market from the original $5000 deposit.
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