Macroeconiomics Eassy #8.docx - Delilah D Mays AC1007506...

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Delilah D. Mays AC1007506 C11E Macroeconomics Assignment 08 Macroeconomics 10/9/2015 Money multiplier is the amount of money commercial banks increase in an economy. Money multiplier is calculated by dividing the increase in money supply in an economy by the increased monetary base that led to the increase. For instance, when the commercial banks get deposits of £1M and the latter lead to £10 million money supply, the money multiplier in this case is 10. The reserve ratio on the other hand refers to the percentage of deposits kept by banks in liquid reserves ( Carpenter & Demiralp, 2012) . At some point, the federal bank would set minimum reserve ratios as a technique for controlling money supply. If an individual has a ratio of 5%, the money multiplier would be expected to be 1/0.05, which equal 20 because the individual deposited £1million with a reserve ratio of 5 percent. The person can be in a position to lend out £20 million ( Hein & van Treeck, 2012) . Nonetheless, there is a possibility that if the individual has a reserve ratio of 5 percent, the money multiplier might be less than 20. The latter can be caused various reasons such as: Currency drain ration Currency drain ratio refers to the percentage of notes kept by personal consumers as cash instead of depositing them in the bank. If individual consumers deposited all their money in the banks, the money multiplier would be bigger. However, the banks cannot lend more if people keep their funds in terms of cash ( Singh & Stella, 2012) .
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