Answer :
Answer:
c) increase by more than $1 million
Explanation:
As the required reverve ratio is les than one the banks will lend a portion of the money whihc is deposits. This makes a multiplication of the amount of money which create through a secondary market (loans) Making possible the increase over a millon,
The reverse ratio goes from zero to one, being one a complete reserve when no loan is possible with the deposits.
Answer:
C) increase by more than $1 million
Explanation:
The effect that an increase in the monetary base causes on the money supply is given by: change in monetary base x money multiplier
the money multiplier is calculated by dividing 1 over the reserve ratio, so if the reserve ration is less than 1, e.g. 0.5, then the money multiplier will = 1 / 0.5 = 2
Following the example, a $1 million increase in the monetary base will increase the money supply by: $1 million x money multiplier = $1 million x 2 = $2 million.
Since the reserve ratio is lower than 1, then the money multiplier will always be more than 1 (e.g. reserve ratio = 0.99, money multiplier = 1.01), so any increase in the monetary base will cause a larger increase in the money supply.