Which of the following represents the formula for the simple deposit multiplier?

• A. \$1 + \text{interest rate}$
• B. \(\text{required reserve ratio} \times 100\)
• C. \(\frac{1}{\text{required reserve ratio}}\)
• D. \(\frac{\text{total deposits}}{\text{total reserves}}\)

Answer: (C)

Verified step by step guidance

1. Understand the concept of the simple deposit multiplier: It is a formula used in banking to determine the maximum amount of money that can be created in the banking system through the process of deposit creation, given a required reserve ratio.
2. Recall the formula for the simple deposit multiplier: The formula is expressed as \( \frac{1}{\text{required reserve ratio}} \). This represents the inverse of the required reserve ratio, which is the fraction of deposits that banks are required to hold as reserves.
3. Analyze why \( \frac{1}{\text{required reserve ratio}} \) is correct: The required reserve ratio determines how much of a deposit must be kept in reserve and not loaned out. The multiplier shows how many times the initial deposit can be expanded in the banking system.
4. Compare the other options: \( 1 + \text{interest rate} \) is unrelated to the deposit multiplier, \( \text{required reserve ratio} \times 100 \) is simply a percentage representation of the reserve ratio, and \( \frac{\text{total deposits}}{\text{total reserves}} \) is a different ratio used for other analyses.
5. Conclude that \( \frac{1}{\text{required reserve ratio}} \) is the correct formula for the simple deposit multiplier, as it directly relates to the reserve requirement and the potential expansion of deposits in the banking system.