Answer to Question #117630 in Macroeconomics for Karan Bhanot

Question

Explain money multiplier (M) and reserve ratio (R) will increase or decrease during the financial crisis.

Answer 1

Higher the required reserve ratio, lesser the excess reserves, lesser the banks can lend as loans, and lower the money multiplier. Lower the required reserve ratio, higher the excessreserves, more the banks can lend, and higher is the money multiplier