If the reserve ratio is 50% the deposit multiplier will be equal to 2.
What is a deposit multiplier?
- It is the amount of money that the bank can add to the cash supply in a loan.
- It is the amount of money created from a reserve.
To calculate the deposit multiplier you will need to take into account the inverse of the reserve ratio. In this case, you will need to use the following expression:
1/(reserve index)
Substituting the values in the formula we will have:
1/(0.50)= 2.
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