Question

Which of the following statements are correct about the money multiplier? (A) It is the ratio of the stock of money to the stock of high powered money.
(B) It is always smaller than one.
(C) Its value depends on the reserve ratio and currency-deposit ratio.
(D) It is inversely related to the reserve ratio.
Choose the correct answer from the options given below:

• A. (A), (B) and (D) only
• B. (A), (B) and (C) only
• C. (A), (C) and (D) only
• D. (A), (B), (C) and (D)

Hint:

The money multiplier is inversely related to the reserve ratio. A higher reserve ratio means a lower money multiplier, reducing the money supply.

Answer 1

The Correct Option is A

Step 1: Define the money multiplier.
The money multiplier quantifies the relationship between the money supply and the monetary base (or high-powered money). It indicates the extent to which the money supply expands for each unit of monetary base. The formula is: \[\text{Money Multiplier} = \frac{1}{\text{Reserve Ratio}}.\]

Step 2: Evaluate the provided options.
- (A) It represents the ratio of the money stock to the monetary base: This statement is accurate. The money multiplier measures the money supply's expansion relative to the monetary base.
- (B) It is always less than one: This statement is inaccurate. The money multiplier typically exceeds one, unless the reserve ratio is 100%.
- (C) Its magnitude is contingent upon the reserve ratio and the currency-deposit ratio: This statement is accurate. The money multiplier's value is influenced by both the reserve ratio and the currency-deposit ratio, impacting the central bank's capacity for money supply expansion.
- (D) It exhibits an inverse correlation with the reserve ratio: This statement is accurate. The money multiplier is inversely proportional to the reserve ratio; an increase in the reserve ratio leads to a decrease in the money multiplier.

Step 3: Final determination.
Options (A), (B), and (D) are the correct descriptions of the money multiplier's relationship.