(Table) Consider the T-account in the table. If the reserve requirement is 20%, then the
A) potential money multiplier and the actual money multiplier are the same.
B) potential money multiplier is larger than the actual money multiplier.
C) potential money multiplier is smaller than the actual money multiplier.
D) actual money multiplier is 5.

Question

(Table) Consider the T-account in the table. If the reserve requirement is 20%, then the 
A) potential money multiplier and the actual money multiplier are the same. 
B) potential money multiplier is larger than the actual money multiplier. 
C) potential money multiplier is smaller than the actual money multiplier. 
D) actual money multiplier is 5.

Quizplus · Accepted Answer

The potential money multiplier is calculated as 1/reserve requirement. In this case, the reserve requirement is 20%, so the potential money multiplier is 1/0.2 = 5. However, the actual money multiplier depends on the amount of excess reserves held by banks, which is unknown from the given information. Therefore, we cannot determine the actual money multiplier. However, we do know that the potential money multiplier is always larger than the actual money multiplier since banks may hold excess reserves, which reduces the amount of money that can be created through the money multiplier process. Therefore, the correct answer is B.

(Table) Consider the T-Account in the Table