What may limit the size of the money supply expansion to an amount less than indicated by the oversimplified deposit-creation formula?
What will be an ideal response?
The oversimplified deposit-creation formula is based on several rather unrealistic assumptions. They are that the banks in the system will lend all their excess reserves; the loan proceeds will all be taken in the form of checking deposits and redeposited in other banks, and that individuals and firms will hold no cash balances. If any of these assumptions are violated, then there will be less excess reserves for banks to lend and, therefore, less new money created.
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