Why decide direction before using the multiplier?

The same multiplier works for expansion and contraction, so a wrong direction reverses the sign even when the arithmetic is right and loses the whole item.

How does the discount rate affect the money supply?

It is the rate at which the central bank lends to banks; raising it makes borrowing dearer, shrinks reserves and so contracts the money supply.

S4 Economics: Money and Banking Paper 4 (reverse multiplier, money aggregates and policy tools)

2026-11-03

S · 4

Paper 4 works backwards from the answer: find the reserve ratio from a multiplier, find total deposits from reserves, and practise the layers of M1 and M2, real interest and purchasing power, plus the three central bank tools. Most marks are lost on units and direction, so decide whether the money supply expands or contracts before choosing to multiply or divide. All values are machine-checked.

Quick answer　A 10 percent reserve ratio turns 8,000 dollars into 80,000 dollars of deposits and 72,000 of new credit; a multiplier of 5 implies a 20 percent ratio; 60,000 million of reserves at 15 percent supports 400,000 million of deposits; M1 is 200,000 million and M2 400,000 million; a nominal 6 percent against 2.5 percent inflation gives a real 3.5 percent, and 20,000 dollars becomes 20,682.93 in purchasing power; a higher discount rate shrinks the money supply; 5,000 dollars at 25 percent needs 1,250 in reserves; a multiplier rising from 4 to 5 means the ratio falls from 25 to 20 percent.

01　Paper details (check answers afterwards)

Item	Detail
Questions	10 questions
Suggested time	25 minutes
Difficulty mix	Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1
Chapter	Chapter: Money
Level	S4

02　Questions (10 items)

FoundationThe reserve ratio is 10 percent and a customer deposits 8,000 dollars. What are total deposits and newly created deposits?
FoundationThe deposit multiplier is 5. What is the reserve ratio?
FoundationTotal reserves in the banking system are 60,000 million and the reserve ratio is 15 percent. What are total deposits?
FoundationCash is 50,000 million, current deposits 150,000 million, savings 90,000 million and time deposits 110,000 million. What are M1 and M2?
IntermediateThe nominal rate is 6 percent and inflation 2.5 percent. What is the real rate, and what is the purchasing power of a 20,000 dollar deposit after one year?
IntermediateA supermarket puts a price tag on every item. Which function of money does this show?
IntermediateThe central bank raises the discount rate. What happens to bank reserves and the money supply?
ChallengeA customer deposits 5,000 dollars and the reserve ratio is 25 percent. What are the reserves and the amount available to lend?
ChallengeThe deposit multiplier rises from 4 to 5. From what reserve ratio to what?
Error redoSomeone claims that more banknotes issued by the central bank must raise the purchasing power of the public. What is wrong?

03　Answers and one-line notes

#	Answer	One-line note
1	Total deposits are 80,000 dollars and 72,000 dollars are newly created.	8,000 divided by 0.1 gives 80,000, then subtract the original 8,000.
2	20 percent.	The reserve ratio is 1 divided by the multiplier, that is 1 over 5.
3	400,000 million.	Total deposits equal reserves divided by the reserve ratio, that is 600 over 0.15.
4	M1 is 200,000 million and M2 is 400,000 million.	M1 counts cash and current deposits only; M2 adds savings and time deposits.
5	The real rate is 3.5 percent and purchasing power is about 20,682.93 dollars.	The real rate is 6 minus 2.5 percent; purchasing power is 20,000 times 1.06 divided by 1.025.
6	Unit of account.	Prices in one unit make different goods comparable, so money acts as a unit of account.
7	Borrowing costs rise, reserves fall and the money supply contracts.	The discount rate is what the central bank charges banks, so raising it reduces a source of reserves.
8	Reserves of 1,250 dollars and 3,750 dollars available to lend.	5,000 times 0.25 gives reserves of 1,250, leaving 3,750 dollars to lend.
9	From 25 percent down to 20 percent.	The reserve ratio is 1 over the multiplier: 1 over 4 is 25 percent and 1 over 5 is 20 percent.
10	The claim confuses the quantity of money with purchasing power; if notes rise while goods do not, prices rise and each dollar buys less.	Purchasing power depends on the price level, and rapid growth of the money supply usually pushes prices up.

04　What to do after marking

After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
Repeat the same item two days later; move to the next paper only when both attempts are correct.
Parents only need the answer and note columns; there is no need to explain every item.

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