Table 29-3. An economy starts with $50,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $45,750. The T-account of the bank is shown below.

Question

Assets Liabilities
Reserves $4,250 Deposits $50,000
Loans 45,750

Refer to Table 29-3. If all banks in the economy have the same reserve ratio as this bank, then the value of the economy’s money multiplier is
a.

11.76.
b.

9.33.
c.

1.09.
d.

10.76.

Answer 1

To calculate the money multiplier, we can use the formula:

\[ \text{Money Multiplier} = \frac{1}{\text{Reserve Ratio}} \]

First, we need to find the reserve ratio. The reserve ratio is defined as the ratio of reserves to total deposits.

From the T-account given in Table 29-3:

• Reserves = $4,250
• Deposits = $50,000

Now we can calculate the reserve ratio:

\[ \text{Reserve Ratio} = \frac{\text{Reserves}}{\text{Deposits}} = \frac{4,250}{50,000} = 0.085 \]

Now, we can use the reserve ratio to calculate the money multiplier:

\[ \text{Money Multiplier} = \frac{1}{\text{Reserve Ratio}} = \frac{1}{0.085} \approx 11.76 \]

Therefore, the value of the economy's money multiplier is approximately 11.76.

The correct answer is a. 11.76.