The process of cumulative expansion of demand deposits assumes that no depositor withdraws cash from the banking system.If some do,when the required reserve ratio is 25 percent and no bank keeps excess reserves,a deposit of $10,000 in newly printed money will lead to an increase in the money supply of
A) less than $30,000.
B) $30,000.
C) $40,000.
D) $50,000.
E) $60,000.

Question

Quizplus · Accepted Answer

With a required reserve ratio of 25%, the money multiplier is 1 / 0.25 = 4. This means that for every dollar of new money deposited, the total money supply can increase by up to $4. Therefore, a $10,000 deposit could lead to a maximum increase of $40,000 in the money supply. However, the statement specifies that if some depositors withdraw cash, the actual increase will be less than the maximum possible. Hence, the correct answer is less than $40,000, which is option A.

The Process of Cumulative Expansion of Demand Deposits Assumes That