To determine the resultant money multiplier when the Federal Reserve sets the reserve rate to 4%, we'll follow these steps:
1. Understand the reserve rate: The reserve rate, sometimes called the reserve requirement, is the portion of depositors' balances that banks must have on hand as cash. This is set by the central bank. In this case, the reserve rate is 4%, which can be expressed as a decimal for calculation purposes.
[tex]\[
\text{Reserve rate} = 4\% = \frac{4}{100} = 0.04
\][/tex]
2. Formula for the money multiplier: The money multiplier is the factor by which the money supply increases as a result of banks being able to lend. It is inversely related to the reserve rate and is given by the formula:
[tex]\[
\text{Money Multiplier} = \frac{1}{\text{Reserve rate}}
\][/tex]
3. Substitute the reserve rate into the formula:
[tex]\[
\text{Money Multiplier} = \frac{1}{0.04}
\][/tex]
4. Calculate the money multiplier:
[tex]\[
\text{Money Multiplier} = 25
\][/tex]
So, the resulting money multiplier when the reserve rate is set to 4% is:
C. 25
