To determine the potential money creation given a deposit of [tex]$1,000 and a reserve requirement of 25%, we need to follow these steps:
1. Understand the Reserve Requirement:
- The reserve requirement is the fraction of deposits that banks are required to keep in reserve and not loan out.
- Here, the reserve requirement is 25%, or 0.25 when expressed as a decimal.
2. Calculate the Money Multiplier:
- The money multiplier indicates how much the money supply can increase based on the reserve requirement.
- The formula for the money multiplier is:
\[
\text{Money Multiplier} = \frac{1}{\text{Reserve Requirement}}
\]
- Substituting the reserve requirement of 0.25:
\[
\text{Money Multiplier} = \frac{1}{0.25} = 4.0
\]
3. Determine the Potential Money Creation:
- The potential money creation is the maximum amount of money that can be created from the initial deposit through the process of lending and re-lending.
- The formula for potential money creation is:
\[
\text{Potential Money Creation} = \text{Deposit} \times \text{Money Multiplier}
\]
- Given a deposit of $[/tex]1,000 and a money multiplier of 4.0:
[tex]\[
\text{Potential Money Creation} = 1,000 \times 4.0 = 4,000
\][/tex]
4. Conclusion:
- Based on these calculations, the potential money creation with a deposit of [tex]$1,000 and a reserve requirement of 25% is $[/tex]4,000.
Among the options provided:
- [tex]$4,000 (Correct Answer)
- $[/tex]5,000
- none of the above
- [tex]$10,000
The correct answer is $[/tex]\[tex]$ 4,000$[/tex].
