In order for the money multiplier to be fully effective, what are some of the assumptions...
In order for the money multiplier to be fully effective, what are some of the assumptions made by central bankers?
Group of answer choices Banks has to loan out all of their excess reserves.
People do not put money under a mattress.
People deposit the money they receive in the bank.
All of the above.
Homework Answers
Option D - All of the above.
In order for the money multiplier to be fully effective, the assumptions that are made by central bankers are
(1) Banks has to loan out all of their excess reserves. - The formula for money supply is 1/reserve ratio that is that money multiplier is a reciprocal of the reserve ratio. When the reserve ratio is 10, the multiplier is 10 and when the reserve ratio is increased to 20, the multiplier goes down to 5 which means that the reserve ratio should be minimal and banks should loan out all of their excess reserves for the money multiplier to be fully effective.
(2) People do not put money under a mattress. - If people keep their money under a mattress in their house, then that money would be fixed and cannot be multiplied by giving loans which are done by financial institutions such as banks. This bank loan will be again be deposited in the banks which would allow banks to increase bank lending further and increase money supply further.
(3) People deposit the money they receive in the bank. - This is because if people receive money and keeps it in their house, the money supply cannot be multiplied and it keeps as constant. Money supply is only multiplied when banks loan out their deposits.
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