Federal Reserve’s Reserve Requirement Ratio
Suppose that households wished to maintain $1.00 in pocket money (currency
and coin) and $10.00 in liquid savings assets (small CDs, money funds, and
savings accounts) for every $1.00 in their checking accounts (transaction
deposits). If banks choose their desired reserves to be ten cents for every dollar
of transaction deposits, what are the reserve multiplier and the money (M2)
multiplier if the Federal Reserve’s reserve requirement ratio is: (a) 8 percent;
10 percent; and (c) 12 percent?