Which of the following scenarios would cause the money multiplier to be smaller than predicted by the calculation below?
$$
\frac{1}{\text { reserve ratio }}
$$

Choose 1 answer:
(A) Banks count loans as assets.
(B) People keep all of their money in banks instead of holding cash.
(C) Banks hold excess reserves.
(D) Banks count deposits as liabilities.
(E) Banks use fractional reserve banking.

Question

Which of the following scenarios would cause the money multiplier to be smaller than predicted by the calculation below?
$$
\frac{1}{\text { reserve ratio }}
$$

Choose 1 answer:
(A) Banks count loans as assets.
(B) People keep all of their money in banks instead of holding cash.
(C) Banks hold excess reserves.
(D) Banks count deposits as liabilities.
(E) Banks use fractional reserve banking.

Accepted Answer

∻Solution by Steps∻ ‖ step 1 ⋮ The money multiplier is calculated as $ \frac{1}{\text{reserve ratio}} $. ‖ ‖ step 2 ⋮ The money multiplier can be smaller than predicted if banks hold excess reserves. This is because holding excess reserves reduces the amount of money available for lending, thus reducing the overall money supply. ‖ ‖ step 3 ⋮ Therefore, the scenario where banks hold excess reserves would cause the money multiplier to be smaller than predicted. ‖ ***C*** ∻Key Concept∻ ⚹Money Multiplier⚹ ∻Explanation∻ ⚹The money multiplier is the ratio of the amount of money in the economy to the amount of reserves in the banking system. If banks hold excess reserves, they lend out less money, which reduces the money multiplier.⚹◊What is the formula for calculating the money multiplier in this scenario?⍭ Generate me a similar question◊

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