Suppose the required reserve ratio is 20 percent. if banks are conservative and choose not to loan all their excess reserves, the real-world deposit multiplier is a) less than 5.b) equal to 5.c) greater than 5.d) equal to 20.

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 with common ratio 0.8<1

Hence infinite sum =

So deposit multiplier is B) equal to 5

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step-by-step explanation:

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