(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 zero.

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 zero.

Quizplus · Accepted Answer

The potential money multiplier is calculated as 1/reserve requirement, which in this case is 1/0.2=5. This means that for every $1 of reserves, the bank can create $5 of money in the economy. However, the actual money multiplier depends on the willingness of the public to hold deposits and the use of excess reserves by banks. If the public chooses to hold more cash or if banks choose to hold excess reserves, then the actual money multiplier will be smaller than the potential money multiplier. Therefore, B is the best choice as the potential money multiplier is always larger than the actual money multiplier.

(Table) Consider the T-Account in the Table