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Running head: ASSIGNMENT 8
1. Why is the money multiplier in the United States smaller than the inverse of the
required reserve ratio? Provide one (1) reason.
The Money Multiplier in the U.S is for some reasons smaller than the inverse of the
required reserve ratio. The money multiplier is basically the amount of money that banks can
generate with every dollar of the reserves. The reserve ratio refers to the percentage of deposits
that banks keep in the form of liquid reserves. In the real world situation, the actual money
multiplier is substantially smaller than the theoretical money multiplier (Goodwin et al., 2015).
One reason for this variation is economic transactions that result in cash outflows such as taxes,
import spending, and savings. When consumer purchase imports there is an economic outflow
because money exists the economy. Similarly, when people pay taxes, a percentage of their
income is deducted and through this fraction of money exits the economic cycle. Also,
consumers do not use spent all their cash; thus not all money is circulated in the economy; they
save a significant amount of their income. For this reason, the U.S money multiplier is
significantly smaller than the inverse of the required reserve ratio.
2. Explain why depositing cash into a checking account does not change the money
supply. Provide one (1) supporting the fact.
When cash is deposited into a checking account, there is no change in the money supply