Suppose Darrell has $4,000 in currency which he deposits in his bank. If the reserve ratio is 25 percent, this will lead to a maximum increase of ________ in M1 throughout all banks.
A) $0
B) $4,000
C) $6,000
D) $12,000

Question

Quizplus · Accepted Answer

When Darrell deposits $4,000 in the bank, the bank keeps 25% ($1,000) as reserves and can lend out the remaining 75% ($3,000). The $3,000 lent out will be deposited in banks, which then keep 25% of that as reserves and lend out the rest, and so on. This process continues, creating a multiplier effect. The money multiplier is 1/reserve ratio = 1/0.25 = 4. Thus, the maximum increase in M1 is $4,000 * 4 = $16,000. However, since the initial $4,000 is part of this increase, the net increase is $16,000 - $4,000 = $12,000.

Suppose Darrell Has $4,000 in Currency Which He Deposits in His