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NISA [10]
3 years ago
15

Suppose the required reserve ratio is 20 percent. If banks are conservative and choose not to loan all their excess reserves, th

e real-world deposit multiplier is A) less than 5.B) equal to 5.C) greater than 5.D) equal to 20.
Mathematics
1 answer:
maria [59]3 years ago
5 0

Answer:

Option B

Step-by-step explanation:

Given that the required reserve ratio is 20 percent.

Since banks are conservative they choose not to loan all their excess reserves

i.e. only 20% of deposits is kept as reserve and 80% lent.

This 80% will again be deposited in a bank and 80% of 80 i.e.64% would be lent.  Thus this will form a geometric progression infinitely as

deposits = 1+0.8 + 0.8^2 +0.8^3+...with common ratio 0.8<1

Hence infinite sum = \frac{a}{1-r} =\frac{1}{1-0.8} \\=5

So deposit multiplier is B) equal to 5

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