I’m currently stuck on a problem.
The question is basically stating that the money supply is at $4000 and the FEDs want to increase it by $200 to $4200. The money multiplier is 3 and people hold no cash. How can they achieve this goal by changing the reserve requirement?
The exact answer provided by the textbook key is:
If people hold no cash, the money multiplier is 1/r.
If this is equal to 3, then the current reserve requirement is 33%.
To increase the money supply by $200, the FEDs should lower the reserve requirement to 32%.
It is my understanding that 1/r = 3 (money multiplier) so thus r must = 1/3
So then r = reserve requirement of 33%.
What I can’t figure out is the relationship between the increase of $200 and the decrease of 1% in the reserve requirement. I can’t conceptualized a “formula”. Can someone show me a formula of how that -1% = +$200?