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Question

If the reserve ratio is ¼ and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by a.$90. b. $150. c.$160. d. $480.

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Solution B

Answered 2 months ago

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1 of 7We are asked if the reserve multiplayer is 4 and the bank increases the number of reserves by $120 by how much does the money supply increases.

Answered 3 months ago

Step 1

1 of 2Recall from the text that the money multiplier is the reciprocal of the reserve ratio. We are given that the reserve ratio is $\dfrac{1}{4}$ so the money multiplier is going to be $\dfrac{4}{1}$

So with a $\$120$ increase in reserves, the money supply will increase by $\$480$ ($\$120\times4$)

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