In an economy, the currency drain is 5 percent of deposits and the desired reserve ratio is 2 percent of deposits. If the central bank buys $100,000 of securities on the open market, calculate the money multiplier. The money multiplier is?
To calculate the money multiplier, we need to use the formula for determining the maximum change in the money supply. The formula is as follows:
Money Multiplier = 1 / (Currency Drain + Desired Reserve Ratio)
In this case, the currency drain is given as 5 percent (or 0.05) of deposits, and the desired reserve ratio is 2 percent (or 0.02) of deposits. Substituting these values into the formula, we have:
Money Multiplier = 1 / (0.05 + 0.02)
= 1 / 0.07
≈ 14.29
Therefore, the money multiplier in this scenario is approximately 14.29.