Question

If the required reserve ratio is 10 percent, what is the monetary multiplier? If the monetary multiplier is 4, what is the required reserve ratio?

Short answer

The money multiplier at 10 percent required ratio is 10.

The required reserve ratio is 0.25 when the money multiplier is 4.

Step-by-step solution

Money multiplier 

The money multiplier measures the increase in the supply due to an increase in the quantity of money in the economy:

The money multiplier =$k=\frac{1}{rr}$

Therefore, if the required reserve ratio is 10, then the money multiplier would be:

$k=\frac{1}{0.1}=10$

The value of the money multiplier will be 10.

Required reserve ratio

If the money multiplier is 4, then the required ratio would be:

$$\begin{gathered} 4=\frac{1}{rr} \\ rr=0.25 \end{gathered}$$

The required ratio will be 0.25.