For the money expansion process to produce the maximum potential multiplier effect

Question

Quizplus · Accepted Answer

For the money expansion process to produce the maximum potential multiplier effect, all loans from banks have to be redeposited throughout the banking system. This is because each time a loan is redeposited, the bank can use a portion of those deposits to make new loans, thereby increasing the money supply. With 100 percent required reserve ratio, banks cannot lend out any of their deposits, limiting the expansion of money supply. The Fed selling government bonds would reduce the money supply, making the multiplier effect impossible. Therefore, choice (D) is the best option.

For the Money Expansion Process to Produce the Maximum Potential