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Attempts: Average: 73 11
Attempts: Average: 73 11. The monetary multiplier Suppose that Deborah makes a new cash deposit of $85,000. If the assumptions of the multiplier-deposit expansion process hold, (with the required reserve ratio set at 25%), this deposit will increase the money supply by $255,000. (Note: Currency held by the public is counted in the money supply as part of M1.) Which of the following assumptions is necessary for the money multiplier (m) to be used in the equation D=Ex m (where D stands for the maximum checkable-deposit creation and E is the initial change in excess reserves)? O Borrowers use the entire loan amount to pay others, who will deposit all of the funds in a checking account. Borrower default rates are stable. O People's marginal propensity to consume does not rise with income. If the above assumption did not hold, the change in the money supply would be than you found because: If people kept some of the new money as cash rather than depositing it in another checking account, this cash could not, in turn, become a bank loan. If people's marginal propensity to consume rose with income, they would save less, removing money from the financial system. If borrower default rates were not stable, then the money creation process would be disrupted.
Expert Solution
Deborah makes a new cash deposit of $85,000
Required reserve ratio = 25%
It means 25% of new cash deposit is has to be keep in reserve and rest 75% (i.e., excess reserve) is used to grant loan which increase the money supply.
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Reuired reserve = 25% * $85000
=>Required reserve = $21250.
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Excess reserve = $85000 - $21250
=> Excess reserve = $63750
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Money multiplier = (1 / required reserve ratio)
=> Money multiplier = (1 / 0.25 ) = 4
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=> Increase in money supply = Excess reserve * money multiplier
=> Increase in money supply = 4 * $63750
=> Increase in money supply = $255,000
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Answer: If the assumptions of the multiplier deposit expression process hold, this deposit will increase the money supply by $255,000.
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Following is the necessary for the money multiplier (m) to be used in the equation D=E*m is borrowers use the entire loan amount to pay others , who will deposit all the funds in the checking account.
Answer: Option (A)
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If the above assumption did not hold, the change in the money supply would be less than you found because If people kept some of the new money rather than depositing in another checking account, this cash could not in turn become a loan.
Answer: Option (A)
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