Question

If $500 of new reserves generates $1000 of new money in the economy, then the money multiplier is

	a.	​2 and the reserve ratio is 2 percent.
	b.	​0.5 and the reserve ratio is 50 percent.
	c.	​0.5 and the reserve ratio is 2 percent.
	d.	2 and the reserve ratio is 50 percent.

Answer 1

Money multiplier = 1/ Reserve ratio  

It is given in the question that, $500 of new reserves generates $1000 of new money
therefore, The reserve ratio = $500 / $1000 x 100
= 50%

Money multiplier = 1/0.5 ( i.e 50%)
= 2.
So the answer is d) 2 and the reserve ratio is 50%.