Final Answer:
The reserve shortage created by a deposit outflow of $5 million is $10 million (option c).
Step-by-step explanation:
When there is a deposit outflow, the reserve shortage is determined by the money multiplier, which is the reciprocal of the reserve requirement ratio. If we assume a reserve requirement ratio of 20%, the money multiplier would be 1/0.20 = 5 (option c).
Now, to find the reserve shortage, we multiply the deposit outflow by the money multiplier. Given a deposit outflow of $5 million, the reserve shortage would be $5 million * 5 = $25 million. However, since the question asks for the reserve shortage, we need to subtract the initial deposit outflow. Therefore, the correct answer is $25 million - $15 million = $10 million (Option C).
Understanding the relationship between deposit outflows, reserve requirements, and the money multiplier is crucial in assessing the impact on a bank's reserves. The reserve shortage represents the additional reserves a bank needs to maintain compliance with reserve requirements after a deposit outflow. This concept is fundamental in monetary policy and banking operations, ensuring the stability and proper functioning of the financial system.