To reach the maximum money multiplier, it is assumed that

Question

Quizplus · Accepted Answer

The maximum money multiplier occurs when all loans get redeposited in a checkable account. This is because when a loan is redeposited, it increases the bank deposits, which in turn can be used to create more loans and increase bank deposits further. This cycle continues, leading to a higher money multiplier. Choice A is not correct because if commercial banks keep the amount of reserves equal to total bank deposits, then there will be no capacity to create new loans and increase the money supply. Choice C is also not correct because insufficient loan demand would limit the amount of loans created and therefore limit the money multiplier. Choice D is not correct because if loans are diverted into circulating currency, then banks will not have the deposits required to create new loans and increase the money supply.

To Reach the Maximum Money Multiplier, It Is Assumed That