The money multiplier formula is 1/reserve ratio. If the reserve requirement is 10%, what is the maximum amount of new money that can be created from CHF 1,000 of new deposits?

Question

BlackTom AI · Accepted Answer

The question asks about the money multiplier and how much money can be created when there are new deposits of CHF 1,000, given a reserve requirement of 10%.

Option a. CHF 1,000: If the reserve ratio is 10%, banks must hold 10% of deposits as reserves, which means they can loan out the remaining 90%. Therefore, the total money supply can expand beyond the initial 1,000, so simply claiming the initial deposit is the total is incorrect.

Option b. CHF 100: 10% of CHF 1,000 is CHF 100, representing the required reserve amount, not the total change in the money supply. This option confuses reserves with the total potential money creation.

Option c. CHF 10,000: The money multiplier equals 1/reserve ratio, so with a reserve ratio of 0.10, the multiplier is 10. The total potential increase in the money stock from a new 1,000 deposit can be 1,000 × 10 = 10,000 in the system. This represents the maximum amount of money (including the original 1,000) that can be supported by the banking process from that initial deposit, assuming all loan proceeds are redeposited and lent out again in a full cycle of the multiplier.

Option d. CHF 9,000: This value would be the amount of new money created beyond the initial deposit if you interpret the total as 10,000 and subtract the original 1,000. However, the standard question framing asks for the total money created by the multiplier effect (i.e., the total expansion), which is 10,000, not 9,000. This option misinterprets the total expansion versus the incremental creation.

In summary, option c correctly applies the money multiplier formula and reflects the full potential expansion of the money supply from the given 1,000 new deposits, accounting for repeated lending and redepositing under a 10% reserve requirement. The other options either misstate the role of reserves, confuse the reserve requirement with total money supply, or misinterpret the multiplier effect.

The money multiplier formula is 1/reserve ratio. If the reserve requirement is 10%, what is the maximum amount of new money that can be created from CHF 1,000 of new deposits?

查看解析

登录即可查看完整答案

类似问题

Suppose the reserve requirement is set at 11 percent and excess reserves are $28 million. What is the money multiplier?

If the Fed were to decrease the required reserve rate from ten percent to five percent, the simple deposit multiplier would