Chapter 17, Problem 7LO

To determine

The changes in the money multiplier

Concept introduction:

With each dollar of reserve, the bank generates some amount of money, this is called money multiplier. A reserve is the deposit that the Federal Reserve wants a bank to maintain for it to meet any unpredicted demands and wants the banks to lend only the remaining amount.

The reciprocal of the required reserve ratio gives the money multiplier. Therefore, with a decrease in the required reserve ratio as desired by the Federal Reserve, the money multiplier increases and similarly the other way around.