What represents the factor by which total deposits expand for every one-pound rise in reserves ?
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Answer: A. Money multiplier
Explanation
The money multiplier determines total deposit expansion per unit increase in reserves. Fractional reserve banking allows banks to lend out excess reserves repeatedly. The multiplier magnifies central bank base money injections into broad money aggregates. Commercial banks maintain cash reserve ratios mandated by regulatory central banks. Multiple deposit expansion occurs as loans are redeposited throughout the banking system. Leakages from currency holdings reduce the maximum potential size of the money multiplier.
Central banks utilize reserve requirements and open market operations to control money supply. Financial stability depends on banks managing liquidity to prevent sudden credit crunches. Monetary policy transmission relies on the money multiplier mechanism working effectively. Liquidity ratios measure bank asset safety rather than total deposit expansion factors. Bank lines of credit represent borrowing limits rather than system-wide deposit multipliers. Required reserve ratios determine the size of the multiplier rather than being the multiplier.
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