(Table) Consider the T-account in the table. If the reserve requirement is 20%, then: $$\begin{array} { | l | l | }
\hline \text { Assets } & \text { Liabilities } \
\hline \$ 25,000 \text { (cash) } & \begin{array} { l }
\$ 50,000 \text { (checking account } \
\text { balances) }
\end{array} \
\hline \$ 50,000 \text { (loans) } & \begin{array} { l }
\$ 25,000 \text { (loan recipients' checking } \
\text { account balances) }
\end{array} \
\hline
\end{array}$$
A) the potential money multiplier and the actual money multiplier are the same.
B) the potential money multiplier is larger than the actual money multiplier.
C) the potential money multiplier is smaller than the actual money multiplier.
D) the actual money multiplier is zero.

Question

(Table) Consider the T-account in the table. If the reserve requirement is 20%, then: $$\begin{array} { | l | l | } 
\hline \text { Assets } & \text { Liabilities } \
\hline \$ 25,000 \text { (cash) } & \begin{array} { l } 
\$ 50,000 \text { (checking account } \
\text { balances) }
\end{array} \
\hline \$ 50,000 \text { (loans) } & \begin{array} { l } 
\$ 25,000 \text { (loan recipients' checking } \
\text { account balances) }
\end{array} \
\hline
\end{array}$$
A) the potential money multiplier and the actual money multiplier are the same.
B) the potential money multiplier is larger than the actual money multiplier.
C) the potential money multiplier is smaller than the actual money multiplier.
D) the actual money multiplier is zero.

Quizplus · Accepted Answer

The potential money multiplier is calculated as 1 divided by the reserve requirement (1/0.20 = 5). However, the actual money multiplier depends on how much of the money is actually lent out and re-deposited in the banking system. Since not all money is re-deposited or lent out, the actual money multiplier is typically smaller than the potential money multiplier.

(Table) Consider the T-Account in the Table A) the Potential Money Multiplier and the Actual Money Multiplier