Multiplier Effect Homework Answers

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Simplifying the Way to Understand the Multiplier Effect Homework Answers

The Multiplier Effect Assignment Answers is used to understand the credit creation process. The Multiplier Effect is an essential economic feature of banks and the economy of a country. A fundamental part of this is the Reserve Ratio. This ratio is used to calculate the amount of deposits that the banks are supposed to keep with themselves. This reserve so created is fixed for all banks but may change as per the requirements of the economy.

The Reserve Ratio also helps to determine the amount of resources the banks can extend to their customers in the form of loans and advances. Thus, the Reserve Ratio is a fundamental aspect of the credit creation process.

The Credit Creation Process or the Multiplier Effect Assignment Answers

To get a better understanding of how the Credit Creation Process takes place in an economy let us study an example.

Let us imagine that you deposit $100 into your bank and the relevant Reserve Ratio in your country is 10%. Thus the bank will keep $10 with them and lend out the remaining $90 to the customers. Then the customers will subsequently deposit this amount into another bank. These banks will then keep $9 with itself and lend out the rest.

This entire process will keep on repeating itself by banks’ lending money and the customers depositing it. This will continue until the initial amount results in a reserve of $1000 i.e., $100/0.10. Thus this is the credit creation process and is also known as the Multiplier Effect Assignment Answers.

Uses of the Multiplier Effect Homework Answers:

The Multiplier Effect Assignment Answers are an important part of the economy of a country. Its various uses are as follows:

  1. Encourages the investment process:

Due to the credit creation process, the customers like you are able to take loans and advances from the banks. This helps you to invest the money in various schemes and incentives. This increases the overall capital available for investment.

  1. Increase in infrastructural resources:

The increased investment as a result of the Multiplier Effect Assignment Answers results in infrastructural development. This increases the standard of living of the population, employment opportunities and reduces the divide between the rich and the poor.

  1. Balancing saving and investing:

One of the best outcomes of the Multiplier Effect Homework Answers is that this encourages the common mass to save and invest their savings. This strengthens the credit creation process and helps to mobilize the savings of the common population. The increases in savings also result in increase in the interest earned on such savings and the return on investments.

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