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Sagot :
Option a is correct. The money multiplier enables calculation of the maximum amount of money that can be created from a dollar deposited into the banking system.
The maximum amount of money that a bank can generate is determined by the money multiplier. The money multiplier measures how much the amount of money will vary if the monetary base changes.
The total amount of reserves held by a bank rises with each dollar deposited into an account. The bank will lend out the extra reserves while keeping some of the necessary reserves on hand. The money supply is increased when such loan is made.
Banks "generate" money in this way to expand the available supply. The money supply grows when a bank makes loans using surplus reserves. Using the money multiplier, we can anticipate the largest change in the money supply.
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