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What is money multiplier?how will you determine its value?
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What is money multiplier?how will you determine its value?
Money multiplier (definition) or deposit multiplier measures the amount of money that the banks are able to create in the form of deposits with every unit of money it keeps as reserves.
Money Multiplier (Determining Value) is inversely related to LRR(Legal Reserve Ratio) which means higher the LRR lower would be the value of money multiplier and vice versa.
money multiplier = 1 by LRR
LRR is given in percent in questions and the answer will come in 'times'.
example if LRR = 10% then. Money Multiplier= 1 by 10%= 10 times
Money Multiplier (Determining Value) is inversely related to LRR(Legal Reserve Ratio) which means higher the LRR lower would be the value of money multiplier and vice versa.
money multiplier = 1 by LRR
LRR is given in percent in questions and the answer will come in 'times'.
example if LRR = 10% then. Money Multiplier= 1 by 10%= 10 times
Community Answer
What is money multiplier?how will you determine its value?
Money Multiplier
Money multiplier is the ratio of the increase in the total money supply to the increase in the monetary base. It indicates the amount of money that is created by the banking system through the process of lending and deposit creation.
Determining the Value of Money Multiplier
The value of money multiplier can be determined by using the following formula:
Money Multiplier = 1 / Reserve Ratio
The reserve ratio is the percentage of deposits that banks are required to hold in reserve. So, if the reserve ratio is 10%, the money multiplier would be:
Money Multiplier = 1 / 0.1 = 10
This means that for every $1 increase in the monetary base, the total money supply will increase by $10.
Factors Affecting Money Multiplier
The value of the money multiplier can be affected by various factors such as:
- Reserve Ratio: As mentioned earlier, the reserve ratio has a direct impact on the money multiplier. A higher reserve ratio will result in a lower money multiplier, while a lower reserve ratio will result in a higher money multiplier.
- Banking System Behavior: The behavior of banks can also impact the money multiplier. If banks are more cautious in lending, the money multiplier will be lower. On the other hand, if banks are more aggressive in lending, the money multiplier will be higher.
- Currency Holdings: The amount of currency held by the public can also impact the money multiplier. If the public holds more currency, the money multiplier will be lower as there will be less money in the banking system to lend out.
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What is money multiplier?how will you determine its value?
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What is money multiplier?how will you determine its value? for Economics 2024 is part of Economics preparation. The Question and answers have been prepared according to the Economics exam syllabus. Information about What is money multiplier?how will you determine its value? covers all topics & solutions for Economics 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for What is money multiplier?how will you determine its value?.
What is money multiplier?how will you determine its value? for Economics 2024 is part of Economics preparation. The Question and answers have been prepared according to the Economics exam syllabus. Information about What is money multiplier?how will you determine its value? covers all topics & solutions for Economics 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for What is money multiplier?how will you determine its value?.
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