CFA Level I · CFA Level I Exam · Monetary Policy
A central bank sets a reserve requirement of 8% of deposits. Assuming banks hold no excess reserves and no cash is held outside the banking system, the money multiplier is closest to:
The money multiplier is 1 divided by the reserve requirement, so 1/0.08 equals 12.5. Each unit of new reserves can support up to 12.5 units of deposits when banks hold no excess reserves and no cash leaks outside the banking system.
- A8.0
- B12.5Correct
- C92.0
Explanation
Money multiplier = 1 / reserve requirement = 1 / 0.08 = 12.5. The 8.0 option wrongly uses the reserve percentage itself, and 92.0 wrongly uses 100 minus the reserve percentage.
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