If the reserve ratio is 20% and a new demand deposit of $10,000 is made,what is the maximum deposit creation possible?
A)$1,500
B)$10,000
C)$15,000
D)$40,000
E)$50,000

Question

Quizplus · Accepted Answer

The maximum deposit creation possible is calculated using the money multiplier formula, which is 1/reserve ratio. With a reserve ratio of 20% (or 0.20), the money multiplier is 1/0.20 = 5. Therefore, the maximum deposit creation from a new demand deposit of $10,000 is $10,000 * 5 = $50,000. However, since the question asks for the maximum deposit creation possible beyond the initial deposit, the correct answer is the total created deposits minus the initial deposit, which is $50,000 - $10,000 = $40,000.

If the Reserve Ratio Is 20% and a New Demand