Final answer:
The money multiplier is calculated using the formula 1/reserve ratio. The correct statement in the given options is d. Will be 5 if the reserve ratio is 20%. The correct answer is option d.
Step-by-step explanation:
The question you're asking relates to the money multiplier, which is an economic concept describing how much the banking system can increase the money supply through the process of bank lending. To dive into your question, we first need to understand the reserve requirement set by central banks, like the Federal Reserve in the United States. The reserve ratio is the percentage of deposits that banks are required to keep on hand and cannot lend out.
Now, let's look at your options. The correct answer to your question is: a. Will be equal to 10 if the reserve ratio is five percent. To understand why this statement is true, we use the formula 1/reserve ratio to calculate the money multiplier. If the reserve ratio is 0.05 (or 5%), then the money multiplier would be 1 divided by 0.05, which equals 20—not 10. Thus, this statement is incorrect.
However, using this formula, we can answer d. Will be 5 if the reserve ratio is 20%. With a reserve ratio of 0.20 (or 20%), the money multiplier would indeed be 1 divided by 0.20, which is equal to 5. Hence, the statement d is correct.
Statements b. Is zero under fractional reserve banking and c. Prevents commercial banks from creating money are both incorrect. The money multiplier is certainly not zero in a fractional reserve banking system; it is what allows banks to create more money through the lending process. And rather than preventing money creation, the multiplier enables it within the constraints of the reserve requirement.