Answer :
To determine the money multiplier when the Federal Reserve sets the reserve rate to 2%, we can follow these steps:
1. Understand the Reserve Rate: The reserve rate, set by the Federal Reserve, is the percentage of deposits that banks are required to keep in reserve and not loan out. In this case, the reserve rate is 2%.
2. Calculate the Money Multiplier: The money multiplier (MM) is calculated as the reciprocal of the reserve rate. The formula for the money multiplier is:
[tex]\[ \text{Money Multiplier} = \frac{1}{\text{Reserve Rate}} \][/tex]
3. Substitute the Reserve Rate: Substitute the given reserve rate (2%) into the formula. Note that 2% as a decimal is 0.02.
[tex]\[ \text{Money Multiplier} = \frac{1}{0.02} \][/tex]
4. Compute the Result: Perform the division.
[tex]\[ \text{Money Multiplier} = 50.0 \][/tex]
Therefore, the correct answer is:
C. 50
1. Understand the Reserve Rate: The reserve rate, set by the Federal Reserve, is the percentage of deposits that banks are required to keep in reserve and not loan out. In this case, the reserve rate is 2%.
2. Calculate the Money Multiplier: The money multiplier (MM) is calculated as the reciprocal of the reserve rate. The formula for the money multiplier is:
[tex]\[ \text{Money Multiplier} = \frac{1}{\text{Reserve Rate}} \][/tex]
3. Substitute the Reserve Rate: Substitute the given reserve rate (2%) into the formula. Note that 2% as a decimal is 0.02.
[tex]\[ \text{Money Multiplier} = \frac{1}{0.02} \][/tex]
4. Compute the Result: Perform the division.
[tex]\[ \text{Money Multiplier} = 50.0 \][/tex]
Therefore, the correct answer is:
C. 50
