Page 194 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Chapter 12

Question 3

Credit multiplier

A bank has a cash ratio of 8%.

Calculate the change in total deposits possible if an initial cash deposit of
$5,000 is made.

Change in total deposits = multiplier × initial cash deposit

Multiplier = 1/cash ratio

Change in total deposits = 1/0.08 × $5,000 = $62,500

Chapter 4

Question 1

Multiplier

A government injects an extra $30m of investment into the economy. In this
economy the marginal propensity to consume is 0.8. All other things being
equal, by how much will the total national income increase?

Change in national income = multiplier × change in investment

Multiplier = 1/MPS or 1/(1 – MPC)

Change in national income = 1/(1 – 0.8) × $30m

Change in national income = 5 × $30m = $150m

188