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What accurately describes how lowering the required reserve ratio increases the money supply?
When the required reserve ratio is lowered, banks can loan out more money.
What are the determinants of money supply in an economy?
Main determinants of the supply of money are (a) monetary base and (b) the money multiplier. These two broad determinants of money supply are, in turn, influenced by a number of other factors. Various factors influencing the money supply are discussed below:1. Monetary Base:Magnitude of the monetary base (B) is the significant determinant of the size of money supply. Money supply varies directly in relation to the changes in the monetary base.Monetary base refers to the supply of funds available for use either as cash or reserves of the central bank. Monetary base changes due to the policy of the government and is also influenced by the value of money.2. Money Multiplier:Money multiplier (m) has positive influence upon the money supply. An increase in the size of m will increase the money supply and vice versa.3. Reserve Ratio:Reserve ratio (r) is also an important determinant of money supply. The smaller cash-reserve ratio enables greater expansion in the credit by the banks and thus increases the money supply and vice versa.Reserve ratio is often broken down into its two component parts; (a) excess reserve ratio which is the ratio of excess reserves to the total deposits of the bank (re = ER/D); (b) required reserve ratio which is the ratio of required reserves to the total deposits of the bank (rr = RR/D). Thus r = re + rr. The rr ratio is legally fixed by the central bank and the re ratio depends on the market rate of interest.4. Currency Ratio:Currency ratio (c) is a behavioural ratio representing the ratio of currency demand to the demand deposits.The effect of the currency ratio on the money multiplier (m) cannot be clearly recognised because enters both as a numerator and a denominator in the money multiplier expression (1 + c/r(1 +t) + c). But, as long as the r ratio is less than unity, a rise in the c ratio must reduce the multiplier.5. Confidence in Bank Money:General economic conditions affect the confidence of the public in bank money and, thereby, influence the currency ratio (c) and the reserve ratio (r). During recession, confidence in bank money is low and, as a result, c and r ratios rise. Conversely, during prosperity, c and r ratios tend to be low when confidence in banks is high.6. Time-Deposit Ratio:Time-deposit ratio (t), which represents the ratio of time deposits to the demand deposits is a behavioural parameter having negative effect on the money multiplier (m) and thus on the money supply. A rise in t reduces m and thereby the supply of money decreases.7. Value of Money:The value of money (1/P) in terms of other goods and services has positive influence on the monetary base (B) and hence on the money stock.8. Real Income:Real income (Y) has a positive influence on the money multiplier and hence on the money supply. A r se in real income will tend to increase the money multiplier and thus the money supply and vice versa.9. Interest Rate:Interest rate has a positive effect on the money multiplier and hence on the money supply. A rise in the interest rate will reduce the reserve ratio (r), which raises the money multiplier (m) and hence increases the money supply and vice versa.10. Monetary Policy:Monetary policy has positive or negative influence on the money multiplier and hence on the money supply, depending upon whether reserve requirements are lowered or raised. If reserve requirements are raised, the value of reserve ratio (r) will rise reducing the money multiplier and thus the money supply and vice versa.11. Seasonal Factors:Seasonal factors have negative effect on the money multiplier, and hence on the money stock. During holiday periods, the currency ratio (c) will tend to rise, thus, reducing the money multiplier and, thereby, the money supply.
What best explains why raising the required reserve ratio results in a decease in the money supply?
The reserve ratio is the percentage of deposits that a commercial bank is required to keep on reserve and not lend out. Lowering the reserve ratio increases the money supply in an economy because it permits banks to lend out more money. When the reserve ratio is lowered banks can use the same amount of deposits to create more loans which increases the money supply.The increase in the money supply following a decrease in the reserve ratio is due to the process of fractional reserve banking. This process allows commercial banks to lend out more money than they have in deposits. For example if the reserve ratio is 10% then a bank can lend out 90% of its total deposits. If the reserve ratio is lowered to 5% the bank can lend out 95% of its deposits. This increased lending expands the money supply in the economy.The increase in the money supply resulting from a decrease in the reserve ratio has several effects. First it increases the money available for lending which can lead to increased investment and consumption. Second it lowers interest rates which makes borrowing more attractive. Finally it can lead to inflation if the money supply increases faster than economic output. For these reasons central banks must carefully consider the impact of changes to the reserve ratio.
What describes how lowering the required reserve ratio reduces the money supply?
When the required reserve ratio is lowered, banks can loan out more money.
What is output multiplier in economics?
The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold on reserves. In other words, it is money used to create more money and calculated by dividing total bank deposits by the reserve requirement. The multiplier effect depends on the set reserve requirement. So, to calculate the impact of the multiplier effect on the money supply, we start with the amount banks initially take in through deposits and divide by the reserve ratio. If, for example, the reserve requirement is 20%, for every $100 a customer deposits into a bank, $20 must be kept in reserve. However, the remaining $80 can be loaned out to other bank customers. This $80 is then deposited by these customers into another bank, which in turn must also keep 20%, or $16, in reserve but can lend out the remaining $64. This cycle continues - as more people deposit money and more banks continue lending it - until finally the $100 initially deposited creates a total of $500 ($100 / 0.2) in deposits. This creation of deposits is the multiplier effect. The higher the reserve requirement, the tighter the money supply, which results in a lower multiplier effect for every dollar deposited. The lower the reserve requirement, the larger the money supply, which means more money is being created for every dollar deposited. source:: http://financial-dictonary.thefreedictionary.com
What accurately describes how lowering the required reserve ratio increases the money supply?
When the required reserve ratio is lowered, banks can loan out more money.
If the money multiplier is 4, what is the required reserve ratio (RRR)?
25 percent
If the currency drain ratio is 0.38 and desired reserve ratio is 0.002 what is the UK money multiplier?
3.612
What happens to the credit multiplier when the cash reserve ratio is increased?
The credit multiplier decreases.
What describes how Lowering the required ratio increases the money supply?
Makes the deposit multiplier bigger. - Dustin SELU
What accurately describes how Lowering the required ratio increases the money supply?
Makes the deposit multiplier bigger. - Dustin SELU
What are the determinants of money supply in an economy?
Main determinants of the supply of money are (a) monetary base and (b) the money multiplier. These two broad determinants of money supply are, in turn, influenced by a number of other factors. Various factors influencing the money supply are discussed below:1. Monetary Base:Magnitude of the monetary base (B) is the significant determinant of the size of money supply. Money supply varies directly in relation to the changes in the monetary base.Monetary base refers to the supply of funds available for use either as cash or reserves of the central bank. Monetary base changes due to the policy of the government and is also influenced by the value of money.2. Money Multiplier:Money multiplier (m) has positive influence upon the money supply. An increase in the size of m will increase the money supply and vice versa.3. Reserve Ratio:Reserve ratio (r) is also an important determinant of money supply. The smaller cash-reserve ratio enables greater expansion in the credit by the banks and thus increases the money supply and vice versa.Reserve ratio is often broken down into its two component parts; (a) excess reserve ratio which is the ratio of excess reserves to the total deposits of the bank (re = ER/D); (b) required reserve ratio which is the ratio of required reserves to the total deposits of the bank (rr = RR/D). Thus r = re + rr. The rr ratio is legally fixed by the central bank and the re ratio depends on the market rate of interest.4. Currency Ratio:Currency ratio (c) is a behavioural ratio representing the ratio of currency demand to the demand deposits.The effect of the currency ratio on the money multiplier (m) cannot be clearly recognised because enters both as a numerator and a denominator in the money multiplier expression (1 + c/r(1 +t) + c). But, as long as the r ratio is less than unity, a rise in the c ratio must reduce the multiplier.5. Confidence in Bank Money:General economic conditions affect the confidence of the public in bank money and, thereby, influence the currency ratio (c) and the reserve ratio (r). During recession, confidence in bank money is low and, as a result, c and r ratios rise. Conversely, during prosperity, c and r ratios tend to be low when confidence in banks is high.6. Time-Deposit Ratio:Time-deposit ratio (t), which represents the ratio of time deposits to the demand deposits is a behavioural parameter having negative effect on the money multiplier (m) and thus on the money supply. A rise in t reduces m and thereby the supply of money decreases.7. Value of Money:The value of money (1/P) in terms of other goods and services has positive influence on the monetary base (B) and hence on the money stock.8. Real Income:Real income (Y) has a positive influence on the money multiplier and hence on the money supply. A r se in real income will tend to increase the money multiplier and thus the money supply and vice versa.9. Interest Rate:Interest rate has a positive effect on the money multiplier and hence on the money supply. A rise in the interest rate will reduce the reserve ratio (r), which raises the money multiplier (m) and hence increases the money supply and vice versa.10. Monetary Policy:Monetary policy has positive or negative influence on the money multiplier and hence on the money supply, depending upon whether reserve requirements are lowered or raised. If reserve requirements are raised, the value of reserve ratio (r) will rise reducing the money multiplier and thus the money supply and vice versa.11. Seasonal Factors:Seasonal factors have negative effect on the money multiplier, and hence on the money stock. During holiday periods, the currency ratio (c) will tend to rise, thus, reducing the money multiplier and, thereby, the money supply.
What is the maximum amount that the money supply can be expanded?
you find the monetary multiplier by dividing 1 with the reserve ratio. (1/RR) then you multiply that with the excess reserves.
What best explains why raising the required reserve ratio results in a decease in the money supply?
The reserve ratio is the percentage of deposits that a commercial bank is required to keep on reserve and not lend out. Lowering the reserve ratio increases the money supply in an economy because it permits banks to lend out more money. When the reserve ratio is lowered banks can use the same amount of deposits to create more loans which increases the money supply.The increase in the money supply following a decrease in the reserve ratio is due to the process of fractional reserve banking. This process allows commercial banks to lend out more money than they have in deposits. For example if the reserve ratio is 10% then a bank can lend out 90% of its total deposits. If the reserve ratio is lowered to 5% the bank can lend out 95% of its deposits. This increased lending expands the money supply in the economy.The increase in the money supply resulting from a decrease in the reserve ratio has several effects. First it increases the money available for lending which can lead to increased investment and consumption. Second it lowers interest rates which makes borrowing more attractive. Finally it can lead to inflation if the money supply increases faster than economic output. For these reasons central banks must carefully consider the impact of changes to the reserve ratio.
What describes how lowering the required reserve ratio reduces the money supply?
When the required reserve ratio is lowered, banks can loan out more money.
What is output multiplier in economics?
The expansion of a country's money supply that results from banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold on reserves. In other words, it is money used to create more money and calculated by dividing total bank deposits by the reserve requirement. The multiplier effect depends on the set reserve requirement. So, to calculate the impact of the multiplier effect on the money supply, we start with the amount banks initially take in through deposits and divide by the reserve ratio. If, for example, the reserve requirement is 20%, for every $100 a customer deposits into a bank, $20 must be kept in reserve. However, the remaining $80 can be loaned out to other bank customers. This $80 is then deposited by these customers into another bank, which in turn must also keep 20%, or $16, in reserve but can lend out the remaining $64. This cycle continues - as more people deposit money and more banks continue lending it - until finally the $100 initially deposited creates a total of $500 ($100 / 0.2) in deposits. This creation of deposits is the multiplier effect. The higher the reserve requirement, the tighter the money supply, which results in a lower multiplier effect for every dollar deposited. The lower the reserve requirement, the larger the money supply, which means more money is being created for every dollar deposited. source:: http://financial-dictonary.thefreedictionary.com
Under a fractional reserve banking system the amount of money loaned out can only increase if what happens?
The required reserve ratio is lowered.
