NAME THE FINANCIAL SECTOR-9.4 40 The Money Multiplier Class Activity 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 $1,000 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 Total Increase in Checkable Deposits per Round Increase $3,000 $2,500 2 3 Total Increase $2,000 5 $1,500 6 $1,000 0 5 10 8 Round 9 10 2 ) 3) What is the total increase in 1) What dollar amount does the graph What is the money multiplier when checkable deposits when excess seem to be approaching as the the reserve ratio is 40%? reserves are $1,000 and the reserve rounds get bigger? ratio is 40%