Question

How is m different from the simple deposit multiplier?

A) 'm' represents the money multiplier, while the simple deposit multiplier is unrelated.
B) 'm' is the inverse of the simple deposit multiplier.
C) 'm' and the simple deposit multiplier are synonymous.
D) The simple deposit multiplier is used in monetary policy, whereas 'm' is a financial term.

Answer 1

'm' represents the money multiplier, while the simple deposit multiplier is a term used to describe the process of determining the overall money supply in an economy.

Step-by-step explanation:

'm' represents the money multiplier, whereas the simple deposit multiplier is a term used to describe the process of determining the overall money supply in an economy. The money multiplier measures the change in the total money supply in the economy divided by a change in the original quantity of money. On the other hand, the simple deposit multiplier measures the overall impact of initial deposits on the total money supply through a series of successive rounds of bank lending and deposit creation.

For example, let's say the initial deposit is $100. If the simple deposit multiplier is 5, then the total money supply created will be $500 because each round of lending and deposit creation increases the money supply by a multiple of the initial deposit.

In summary, 'm' is related to the money multiplier, while the simple deposit multiplier is a concept that explains the process of determining the overall money supply based on initial deposits and subsequent bank lending.