Asked by Lyric Bolden on Jun 29, 2024
Verified
The deposit expansion multiplier is
A) the reserve ratio.
B) the excess reserves.
C) the reciprocal of the reserve ratio.
D) the reciprocal of the discount rate.
E) equal to 1.
Deposit Expansion Multiplier
The ratio of the amount by which deposits can increase to the original amount of new reserves; it shows how money multiplies in the banking system.
Reserve Ratio
This is the fraction of depositors' balances banks must have on hand as cash.
Discount Rate
The rate of interest applied to loans obtained by commercial banks and other saving organizations from the lending facility of their regional Federal Reserve Bank.
- Elucidate the principle of the deposit expansion multiplier and its impact on the banking system as well as the money supply.
Verified Answer
AU
Akunna UzomahJul 01, 2024
Final Answer :
C
Explanation :
The deposit expansion multiplier is the reciprocal of the reserve ratio. It represents the maximum amount that the money supply can increase for a given amount of new reserves. For example, if the reserve ratio is 10%, the deposit expansion multiplier is 1/0.10 = 10. This means that an increase in reserves of $100 can potentially increase the money supply by up to $1,000 (10 x $100).
Learning Objectives
- Elucidate the principle of the deposit expansion multiplier and its impact on the banking system as well as the money supply.