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?

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The question describes the money multiplier formula as 1 / reserve ratio. With a reserve requirement of 10%, the money multiplier is 1 / 0.10 = 10.

Option a: CHF 1,000. This would represent just the initial deposit, not the total potential money created through the banking system’s lending process. It ignores the multiplier effect.

Option b: CHF 100. This value has no support in the given framework; it misinterprets the scale of reserves or the multiplier effect.

Option c: CHF 9,000. This aligns with the standard calculation: total money created through the banking system from a 1,000 CHF new deposit equals the initial deposit multiplied by the money multiplier minus the initial deposit itself, i.e., 1,000 × (10 − 1) = 9,000. Equivalently, the maximum increase in the money supply due to lending is 10,000 total, minus the 1,000 originally deposited, yielding 9,000 new money.

Option d: CHF 10,000. This would be the total potential money supply after full multiplier expansion (1,000 × 10 = 10,000), not the amount of new money created beyond the original deposit. It ignores the distinction between initial deposits and new money created via lending/ multiplier.

In summary, the key concept is that the reserve ratio determines how much of a new deposit can be lent out, and the total potential money in the system becomes 10 times the deposit, while the amount newly created beyond the original deposit is 9,000.

Macro 3A mock exam

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?

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