b. (i) Define the term money multiplier? (ii) Assume that Lucky Bank is required to hold a 10% deposits as reserves, is a $3000 increase in demand deposits. Calculate the money multiplier? How much additional new demand deposits could the $3,000 deposit support?

b. (i) Define the term money multiplier? (ii) Assume that Lucky Bank is required to hold a 10% deposits as reserves, is a $3000 increase in demand deposits. Calculate the money multiplier? How much additional new demand deposits could the $3,000 deposit support?

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Monetary System

Section: Chapter Questions

Problem 10PA

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Concept explainers

Required Reserve and Excess Reserve Analysis

A required reserve is an amount of cash that banks must keep with themselves, which is certain percentage of the deposits made by their customers. Required reserve is a percentage of the bank's deposits that the respective bank must have on each overnight. The percentage rate is set and determined by the nation’s central bank. It is important to have such funds accumulated to meet its uncertain obligations, sudden liabilities and withdrawals. Required reserve is also known as reserve ratio. Reserve ratio is an important tool to control the money supply.

Question

b. (i) Define the term money multiplier?
(ii) Assume that Lucky Bank is required to hold a 10% deposits as reserves, is a $3000 increase
in demand deposits. Calculate the money multiplier? How much additional new demand
deposits could the $3,000 deposit support?

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