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If the Federal Reserve Bank wanted to set the money multiplier at mm = 12.5, what reserve ratio should it require? (Use the simple money multiplier for this calculation.) Type an answer and press enter to submit %

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Answer:

The correct answer is 8%.

Explanation:

The money multiplier shows the degree of change that can be caused in the money supply due to a change in the deposits. It is calculated as 1/RR or required reserve ratio.

If the Federal reserve bank wants the money multiplier to be 12.5,

Money multiplier = [tex]\frac{1}{RR}[/tex]

12.5 = [tex]\frac{1}{RR}[/tex]

RR = [tex]\frac{1}{12.5}[/tex]

RR = 0.08

So the required reserve ratio should be 8%.