One shortcoming of the Simple Deposit Multiplier is

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Question restatement: The prompt asks for a shortcoming of the Simple Deposit Multiplier, a concept in monetary economics.
Option 1: 'Money creation occurs despite the presence of well qualified borrowers.' This statement is not typically a shortcoming of the simple multiplier; in fact, the model assumes that loans are lent if there are qualified borrowers and reserves allow it. It ignores other frictions, but this option does not pinpoint the classic weakness the model recognizes, which is not primarily about borrower qualification but about the leakage of reserves.
Option 2: 'Increased demand for loans results in Excess Reserves.' In the simple model, excess reserves are not the primary mechanism or outcome described; the framework usually treats reserves as a constraint that translates deposits into loans up to the reserve ratio. This option misstates the typical relationship and is not identifying the standard shortcoming.
Option 3: 'Household deposits create Demand Deposits.' This describes a feature of the money-creation process (the circular flow from deposits to reserves to loans) but does not capture a flaw or limitation of the simple deposit multiplier itself. It explains a mechanism rather than a defect.
Option 4: 'If banks hold onto Excess Reserves and funds leak out of the system.' This is the classic shortcoming: the simple deposit multiplier overstates money creation because it assumes banks lend out all excess reserves and that there is no leakage or leakages (such as currency held by the public, banks keeping excess reserves, or other withdrawals). In reality, banks may hold excess reserves, and money may exit the system through currency drain or other withdrawals, reducing the multiplier effect. This aligns with the known limitation of the model by failing to account for reserve hoarding and leakage, which dampen the intended multiplier.
Summarizing the mismatch: Options 1–3 describe broader mechanisms or features that are not the core weakness of the simple deposit multiplier, whereas Option 4 directly identifies the critical inefficiency (excess reserves and leakage) that undermines the multiplier’s predicted level of money creation.

BUSFIN 4265 SP2025 (5285) Quiz #2 Brandl 2e Chapters 7-10

One shortcoming of the Simple Deposit Multiplier is

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