The correct option that defines money multiplier if rr represents the reserve ratio.
Answer to Problem 16MCQ
Option b is correct.
Explanation of Solution
Explanation for the correct option:
c.
The money multiplier refers to the ratio of the money supply to the monetary base. If all cash is deposited in the bank and there is no
Explanation for incorrect options:
a.
The Reserve ratio is represented by rr. The money multiplier is equal to 1/rr if all cash is deposited in the bank and there is no excess reserve. Therefore, option a is incorrect.
b.
The money multiplier represents the change in money supply if the monetary base is changed. It cannot be represented by 1-rr. Therefore, option b is incorrect.
d.
The squared reserve ratio is not equivalent to a money multiplier. Therefore, option d is incorrect.
e.
The monetary base is the sum of the circulation of currency and the bank’s reserve. The money multiplier can be determined by 1/rr which means the change in reserve ratio will change the monetary base. Therefore, option e is incorrect.
Liquid assets: Assets that can be converted into cash or cash equivalents in a very short span of time are referred to as liquid assets.
Chapter 5R Solutions
Krugman's Economics For The Ap® Course
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