Question

After a long day of selling delicious tacos at his city market stall, Juan deposits his earnings of $7,500 into his business account at Fifth Third Bank. At the time of his deposit, the bank was under a federal requirement to reserve 4% of all deposits. Using the multiplier deposit formula, how much new money can be redistributed in the economy from loans based on his deposit?

a) $30,000
b) $7,200
c) $7,500
d) $187,500

Answer 1

Using the money multiplier formula with a reserve requirement of 4%, we find that the potential new money created from Juan's $7,500 deposit is $187,500. Thus, the option d is the correct answer.

Step-by-step explanation:

The student's question involves calculating the maximum potential amount of new money that can be redistributed in the economy from Juan's deposit using the money multiplier formula. Since the reserve requirement is 4%, the money multiplier can be calculated as 1 divided by the reserve ratio (RR). In this case, the money multiplier is 1 / 0.04, which equals 25. To determine the maximum potential new money created in the economy, we multiply Juan's deposit of $7,500 by the money multiplier of 25. Therefore, the new money that could be generated through loans from his deposit is $7,500 * 25, which results in $187,500.