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Discussion: Question about the money multiplier
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Question about the money multiplier
Apr 30 2008, 5:54 PM EDT When I need to find the maximum increase in the total money supply, where the money deposited is $100 and the reserve requirement is 10 percent, do I multiply the total money deposited by the money multiplier, or do I multiply the excess reserves by the multiplier to find the increase, or does it depend on the situation? I thought that I would multiply the initial deposit by the multiplier, thus getting an increase of $1000. My answer key, though, said that increase is $900. When I asked my teacher, she said that you subtract out the original $100 from the $1000 to get the increase in money supply. The reason I'm confused is that another question asking for an increase resulting from the Fed buying securities from the public doesn't subtract out the original value. Do you do something different when dealing with money in a bank/checking account and the purchase of securities? Or, do I really subtract out the initial deposit? If so, can you explain why? I really appreciate any help. Thanks! Do you find this valuable? |
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