How does a stimulus program (through the money multiplier) affect the money supply?Note:
effect depends on the set reserve requirement. So, to calculate the impact of the multiplier effect on the money supply, we start with the amount banks initially take in through deposits and divide this by the reserve ratio. [ If, for example, the reserve requirement is 20%, for every $100 a customer deposits into a bank, $20 must be kept in reserve. However, the remaining $80 can be loaned out to other bank customers. This $80 is then deposited by these customers into another bank, which in turn must also keep 20%, or $16, in reserve but can lend out the remaining $64. This cycle continues - as more people deposit money and more banks continue lending it - until finally the $100 initially deposited creates a total of $500 ($100 / 0.2) in deposits. This creation of deposits is the multiplier effect.
The higher the reserve requirement, the tighter the money supply, which results in a lower multiplier effect for every dollar deposited. The lower the reserve requirement, the larger the money supply, which means more money is being created for every dollar deposited.
] Auto answered|Score 1|markworley|Points 170|Note:
I'm sorry that that wasn't a good answer. Please hold on while I contact an expert.Weegy:
The money multiplier is the additional amount of money the banking system generates with each additional dollar of reserves. [ Economists, policymakers and elected officials can use multipliers to model and assess the economic impact of their policy decisions. ] Expert answered|chikaygoods|Points 180|
All Categories|No Subcategories|Expert answered|Rating 0| 8/27/2012 11:34:12 PM