The money multiplier formula is 1/reserve ratio. If the reserve requirement is 10%, what is the maximum amount of new money that can be created from CHF 1,000 of new deposits?

Question

BlackTom AI · Accepted Answer

The question centers on the money multiplier concept. The multiplier is 1 / reserve ratio. With a reserve requirement of 10%, the multiplier equals 1 / 0.10 = 10.

Option a. CHF 100: This would correspond to a multiplier of 0.1, which is inconsistent with a 10% reserve requirement. It underestimates the potential expansion of deposits.

Option b. CHF 10,000: Using the multiplier, 1,000 new deposits can support up to 10,000 in total deposits in the banking system (1,000 × 10). This is the maximum total money that can be created from the initial 1,000 of new deposits when the entire lender-borrower cycle fully propagates through multiple deposit-loan rounds. It reflects the full expansion of deposits, not just the initial addition.

Option c. CHF 1,000: This would imply no money creation beyond the original deposit, which ignores the loan-and-deposit process enabled by the reserve ratio. With a 10% reserve, banks lend out a large portion, generating more deposits, so this is incorrect.

Option d. CHF 9,000: If interpreted as “new money created,” this would be the incremental amount beyond the initial deposit (10,000 total minus 1,000 initial equals 9,000). However, the question asks for the maximum amount of new money that can be created from the initial 1,000 deposits, and the standard interpretation yields the total potential money supply of 10,000. Therefore this would be a misinterpretation of the wording in the context of the money multiplier framework.

In summary, with a 10% reserve ratio, the money multiplier is 10, so an initial CHF 1,000 of new deposits can lead to up to CHF 10,000 in total deposits within the banking system under full multiplier effects.

The money multiplier formula is 1/reserve ratio. If the reserve requirement is 10%, what is the maximum amount of new money that can be created from CHF 1,000 of new deposits?Single choice

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