Why is the multiplier always above one?

Because it is 1 divided by the reserve ratio, which is a fraction between zero and one, so its reciprocal must exceed one.

Should error review be timed?

Yes. In exams most marks are lost to slow working or missed conditions rather than to not knowing the method.

S6 Economics | Monetary Policy Practice Paper 4 (Error Review)

2026-11-04

Tutor Prep Guide · Secondary Economics

Focused on the marks most often lost: treating the reserve ratio percentage as the multiplier, forgetting which way the multiplier scales, misapplying the Fisher equation and omitting the cash-to-deposit ratio, all redone with fresh numbers.

Attempt first, mark afterwards　Allow about thirty minutes; write the formula before substituting, then use the explanation to see whether the slip was the formula, the direction or the units.

01　Paper details (check answers afterwards)

Item	Detail
Questions	10 items
Suggested time	About 30 minutes
Difficulty mix	Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1
Chapter	Chapter: S6 Economics \| Monetary Policy
Level	S6 (Secondary 6) Economics

02　Questions (10 items)

FoundationThe required reserve ratio is 8% with no excess reserves and no extra cash held by the public. What is the simple deposit multiplier?
FoundationContinuing from the previous item, banks hold 360 billion of reserves. How many billion of deposits can that support at most?
FoundationThe central bank buys 40 billion of bonds in the open market and the multiplier is 12.5 as above. By how much can deposits rise at most?
FoundationUnder the Hong Kong money supply definitions, what are the two components of M1?
IntermediateThe nominal interest rate is 5.5% and expected inflation is 2%. Using the exact Fisher equation, what is the real interest rate?
IntermediateThe central bank sells 60 billion of bonds with a 8% required reserve ratio and no excess reserves. By how much can the money supply contract at most?
IntermediateQuantity theory MV = PY: money supply 900 billion, velocity 5 and real output 1,000 billion. Find the price level; if money supply rises 8% with V and Y unchanged, what is the new price level?
ChallengeThe public holds 150 billion in cash and banks hold 750 billion of deposits (cash-to-deposit ratio 0.2), with a 10% required reserve ratio and no excess reserves. Find the money multiplier and the money supply.
ChallengeBanks hold 2,000 billion of deposits with a 10% required reserve ratio (required reserves 200 billion) plus 120 billion of voluntary excess reserves. What are the excess reserve ratio and the effective deposit multiplier, against a theoretical 10.0?
Error redoError review: a student saw a 8% required reserve ratio and wrote the deposit multiplier as 8. What is wrong?

03　Answers and one-line notes

#	Answer	One-line note
1	12.5	The deposit multiplier is 1 divided by the required reserve ratio, 1 / 0.08 = 12.5; a lower ratio lets the same reserves support more deposits.
2	4,500 billion	360 x 12.5 = 4,500; the multiplier scales reserves up into deposits, not the other way round.
3	By up to 500 billion	40 x 12.5 = 500; buying bonds adds reserves, and multiplying by the deposit multiplier gives the maximum expansion.
4	Notes and coins held by the public plus demand deposits with banks	M1 counts cash in the hands of the public and demand deposits available on demand; cash held by banks and savings or time deposits are not part of M1.
5	About 3.43%	(1 + 0.055) / (1 + 0.02) – 1 = 3.43%; the rough nominal-minus-inflation rule gives 3.5%, a gap of 0.07 percentage point.
6	750 billion	60 x 12.5 = 750; selling bonds drains reserves and the multiplier of 12.5 magnifies the contraction.
7	P = 4.5; after the 8% rise, P = 4.86	900 x 5 / 1000 = 4.5; with M up 8% and V and Y unchanged, P rises by the same 8%, giving 4.86.
8	Multiplier 4.0, money supply 900 billion	Multiplier = (1 + 0.2) / (0.2 + 0.10) = 4.0; base money = 150 + 75 = 225, and 225 x 4.0 = 900 billion.
9	Excess reserve ratio 6.0%, effective multiplier 6.25, below the theoretical 10.0	120 / 2,000 = 6.0%; the effective multiplier is 1 / (0.10 + 0.06) = 6.25, so idle reserves reduce the real expansion power.
10	The multiplier is 1 / 0.08 = 12.5; treating the percentage reserve ratio itself as the multiplier inverts the formula	The reserve ratio says how much must be kept per dollar of deposits, while the multiplier says how many deposits each dollar of reserves supports; they are reciprocals, so the multiplier is always above one.

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.

Need a tutor for this chapter? Register here Tutor Registration →

Questions and answers are written originally by the TutorZone team and are not taken from any school, publisher or examination authority paper. Every value is checked by computer.