Assume that the value of the cash reserve ratio is 25%. What will be the value of money multiplier?
Show answer & explanation
Correct answer: A
Explanation
The correct answer is option 1 i.e. 4.
The money multiplier (MM) is calculated using the formula:
MM= 1/Cash Reserve Ratio (CRR)
Given that the Cash Reserve Ratio (CRR) is 25%, or 0.25 in decimal form, the money multiplier would be:
MM= 1/0.25 = 4
Thus, the value of the money multiplier is 4. This implies that every unit of currency deposited results in four times the amount in the money supply.