Final answer:
The maximum possible increase in the money supply due to a $3,500 bank deposit with a 10% reserve requirement would be $35,000, using the money multiplier of 10. However, the actual increase may be less if banks choose to hold extra reserves or if some money does not get redeposited into the banking system.
Step-by-step explanation:
If you deposit $3,500 in a bank with a 10% reserve requirement, the maximum potential increase in the money supply would be this amount multiplied by the money multiplier. The money multiplier is calculated as 1 divided by the reserve ratio, which in this case is 1 / 0.10, equal to 10. Therefore, the maximum possible increase in the money supply would be $3,500 multiplied by 10, equaling $35,000. However, this maximum increase would only occur if banks loan out all excess reserves and all money loaned out is deposited back into the banking system.
The real-world increase in money supply could be less due to several factors:
- Banks may hold extra reserves, particularly in uncertain economic times or due to regulatory expectations (Option A).
- The central bank could increase the reserve requirement, reducing the potential expansion of the money supply (in reference to the provided information).
- Some loan recipients might opt to hold cash instead of depositing it in banks, which limits the money's re-entrance into the banking system and thus reduces the money multiplier effect (Option D).