If the Fed were to decrease the required reserve rate from ten percent to five percent, the simple deposit multiplier would

Question

BlackTom AI · Accepted Answer

Consider what the simple deposit multiplier is defined as: it equals 1 divided by the required reserve ratio (RRR).

Option 1: "double". This is the correct consequence of the change. If the reserve requirement falls from 10% (0.10) to 5% (0.05), the multiplier goes from 1/0.10 = 10 to 1/0.05 = 20, which is indeed a doubling.

Option 2: "decrease by 5 percent". This misstates the effect: the multiplier is not expressed in a direct percentage change relative to its previous value here; it moves from 10 to 20, which is an increase, not a decrease of 5 percent.

Option 3: "increase by a factor of 5". While the multiplier does increase, the factor is not 5x; it goes from 10 to 20, which is a 2x increase, not 5x. The description overstates the magnitude.

Option 4: "be half as large as it was before the reduction." This would imply the multiplier drops to 5 if it were half of 10, but in reality it doubles to 20, so this statement is incorrect.

In sum, the core concept is that lowering the reserve requirement raises the deposit multiplier, and halving the reserve ratio doubles the multiplier, which matches option 1. The other options either misstate the direction of change, the magnitude, or both.

If the Fed were to decrease the required reserve rate from ten percent to five percent, the simple deposit multiplier wouldSingle choice

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The money multiplier equals 1/(1 - R), where R represents the reserve ratio.

TB MC Qu. 04-35 The Fed changes reserve requirements from... The Fed changes reserve requirements from 10 percent to 13 percent, thereby eliminating $700 million in excess reserves. The total change in deposits (with no drains) would be (rounded):

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