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Select ALL the CORRECT answers regarding the money multiplier (bank multiplier): A
Select ALL the CORRECT answers regarding the money multiplier (bank multiplier):
A. If the proportion of the demand for money that the population wants to keep in cash is 1, the bank multiplier is 1.
B. If the bank multiplier is greater than 1, the monetary base is greater than the money supply.
C. It allows calculating the change in the money supply before a change in the monetary base.
D. Represents the waves of induced spending in an economy derived from a change in autonomous spending.
E. If the central bank imposes a regulation in which the demand deposit reserves that commercial banks have to hold decrease, the bank multiplier increases.
F. If the bank multiplier is equal to 1, the monetary base is less than the money supply.
Expert Solution
Correct answers:
A: because if population wants to keep all the money in cash, then bank will not able to multiply money.hence, bank multiplier will also equal to 1.
C: change in money supply = bank multiplier * change in monetary base. so, we can calculate the change in money supply before actual changes in monetary base using this formula.
D:when induced spending is more in economy, then bank will have more money as deposit and hence, bank will able to increase money supply.
E: Bank multiplier= total deposits/demand deposit reserves. hence, bank multiplier increases with any decrease in damand deposit reserves.
Incorrect answers:
B: Bank multiplier= Money supply/monetary base. hence if it is greater than 1, means money supply > monetary base
F:Bank multiplier= Money supply/monetary base. hence if it is equal to 1, means money supply = monetary base
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