ANALYZING THE FORMULA We have learned the money multiplier is equal to the reciprocal of the reserve ratio. But how do we know this is true? The following problem illustrates the answer. Suppose a bank has $1,ooo in excess reserves and a reserve ratio of 40%. Assume no money is held as currency in circulation and all excess reserves are loaned out. Calculate the increase to the money supply each round in the middle column. Then in the right-hand column, keep a running total of how much money has been created. Graph these data points using "Round" on the x-axis and "Total Increase" on the y-axis. Use this information to answer the questions. Round Increase Total per Round Total Increase in Checkable Deposits Increase $3,000 $2,500 2 Total Increase $2,000 5 $1,500 6 7 $1,000 0 2 6 7 10 8 Round 9 10 1) What dollar amount does the graph 2 ) What is the money multiplier when 3) What is the total increase in seem to be approaching as the the reserve ratio is 40%? checkable deposits when excess rounds get bigger? reserves are $1,000 and the reserve ratio is 40%