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    Question

    What is money multiplier? 

    A Ratio of deposits in the banking system to total reserves Correct Answer Incorrect Answer
    B Ratio of total loans by commercial banks to total deposits Correct Answer Incorrect Answer
    C Ratio of total loans by commercial banks to total reserves Correct Answer Incorrect Answer
    D Ratio of total deposits by commercial banks to total capital of the banks Correct Answer Incorrect Answer
    E Ratio of currency in circulation to total deposits in banks Correct Answer Incorrect Answer

    Solution

    Money multiplier measures an estimate of the maximum amount of commercial bank money that can be created, given a certain amount of central bank money. That is, in a fractional-reserve banking system, the total amount of loans that commercial banks are allowed to extend (the commercial bank money that they can legally create) is equal to an amount which is a multiple of the amount of reserves. This multiple is the reciprocal of the reserve ratio, and it is an economic multiplier.

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