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: Understand the money multiplier.
The money multiplier is the ratio of the money supply to the base or high-powered money. It indicates how much the money supply increases for every unit of high-powered money. It is calculated as: \[ \text{Money Multiplier} = \frac{1}{\text{Reserve Ratio}}. \]

Step 2: Analysis of options.
- (A) It is the ratio of the stock of money to the stock of high-powered money: This is correct. The money multiplier measures how much the money supply increases relative to high-powered money.
- (B) It is always smaller than one: This is incorrect. The money multiplier is generally greater than one, except in cases where the reserve ratio is 100%.
- (C) Its value depends on the reserve ratio and currency-deposit ratio: This is correct. The money multiplier is influenced by both the reserve ratio and the currency-deposit ratio, affecting how much the central bank can expand the money supply.
- (D) It is inversely related to the reserve ratio: This is correct. The money multiplier is inversely proportional to the reserve ratio; as the reserve ratio increases, the money multiplier decreases.

Step 3: Conclusion.
The correct answer is (A), (B), and (D) only, as these options correctly describe the relationship of the money multiplier.