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The Money Multiplier is a concept that helps us understand how an initial deposit can lead to a larger increase in the money supply through the process of fractional reserve banking. Here's how you can calculate the Money Multiplier:
1. Determine the required reserve ratio, which in this case is 20% (0.20 as a decimal).
2. Use the formula for the Money Multiplier: Money Multiplier = 1 / Required Reserve Ratio.
3. Plug in the values: Money Multiplier = 1 / 0.20 = 5.
Therefore, in this scenario with a required reserve ratio of 20%, the Money Multiplier is 5. This means that for every dollar deposited into the banking system, the money supply can potentially increase by up to 5 times through the lending process based on the reserve requirements.Answer:
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