Author Question: Why is the real-world deposit multiplier smaller than 1/RR, where RR is the required reserve ratio? ... (Read 110 times)

audragclark · **on:** Jun 29, 2018

Why is the real-world deposit multiplier smaller than 1/RR, where RR is the required reserve ratio?

What will be an ideal response?

Question 2

When inflation is very low, how do workers and firms adjust their expectations of inflation?

A) They tend to ignore inflation.
B) They are more aggressive in asking for wage and price increases.
C) They rapidly adjust their expectations of inflation downward.
D) They rapidly adjust their expectations of inflation upward.

ApricotDream · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

There are two reasons why the real world multiplier is smaller than the deposit multiplier, 1/RR. First, banks do not loan out all their excess reserves. Banks like to keep some excess reserves on hand in case withdrawals are higher than the bank might typically expect. If this is the case, then the amount of money that is available to loan out in the next round is a bit smaller. This will shrink the amount of money expansion. Second, not all money that is loaned out in the money expansion process is put back into the banking system. Some of it leaks out in the form of currency and does not get entirely redeposited. Both of these actions make the money expansion smaller.

Answer to Question 2

A