Chapter 14 Homework Solutions
1.
“The money multiplier is necessarily greater than 1.”
Is this statement true, false, or
uncertain?
The money multiplier is defined as (1+c)/(rr+e+c).
Under what condition
would this variable be less than or equal to 1?
(1+c)/(rr+e+c) ≤ 1
1+c ≤ rr + e + c
1 ≤ rr + e
Only if the sum of the reserve requirement plus the excess reserve ratio is
bigger than 1 will the money multiplier ever be smaller than 1.
Given that the
reserve requirement is almost always smaller than 20% and excess reserve
ratios are rarely larger than 1%, the money multiplier will pretty much never
be less than 1.
It is theoretically possible, but practically implausible.
Note further that as long rr + e < 1, the money multiplier will be larger than 1
regardless of what the currency ratio is.
2.
“If reserve requirements on checkable deposits were set at zero, the amount of
multiple deposit expansion would go on indefinitely.”
Is this statement true, false, or
uncertain?
As long as e or c are different from zero, then there will not be an infinite
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 Spring '11
 Teerana
 Interest Rates, Monetary Policy, Federal Reserve System, Fractionalreserve banking, excess reserve ratio

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