With commercial banks operating on a 20 percent reserve ratio, the money multiplier equals ?
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Answer: D. 5
Explanation
The money multiplier is calculated as the reciprocal of the required reserve ratio. Dividing one by the reserve ratio of zero point two zero yields five. Commercial banks create checkable deposits through fractional reserve lending based on this exact multiplier. Fractional reserve banking requires institutions to retain only a fraction of customer deposits. The simple deposit multiplier assumes no cash leakage and no excess reserves held by banks. Calculations for monetary expansion rely directly on the formula one divided by reserve ratio.
Central banks utilize reserve requirements as a monetary policy tool to control money supply. Commercial lenders must understand this ratio to manage daily liquidity and lending operations safely. Economic forecasting models use the money multiplier to predict inflationary pressures from monetary policy. Option A represents the correct final numerical calculation derived from the given ratio. Option B confuses the percentage reserve ratio directly with the final multiplier coefficient. Option C represents a completely different numerical value unrelated to the specified reserve requirement.
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