A reserve requirement of 5 percent implies a potential money deposit multiplier of ________.
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A. B. C. D. E.A
The potential money deposit multiplier is the reciprocal (inverse) of the required reserve ratio. Thus, a reserve requirement of .5 implies a potential money deposit multiplier of 1/.5 = 20.
The potential money deposit multiplier refers to the amount of money that can be created through the banking system as a result of a change in the reserve requirement. In this case, the reserve requirement is stated as 5 percent.
The reserve requirement is the percentage of deposits that banks are required to hold as reserves and not lend out. When the reserve requirement is lower, banks have more funds available to lend, which can increase the money supply in the economy.
To calculate the potential money deposit multiplier, we use the formula:
Money Deposit Multiplier = 1 / Reserve Requirement
In this case, the reserve requirement is 5 percent, which is equivalent to 0.05 (5/100).
So, the potential money deposit multiplier would be:
Money Deposit Multiplier = 1 / 0.05 = 20
Therefore, the correct answer is option A: 20.