What happens to the value of the deposit multiplier when banks hold excess reserves?
A) It is larger than the value implied by the formula.
B) It is smaller than the value implied by the formula.
C) It is only affected by the amount of loans that banks are willing to make, not the amount of excess reserves held.
D) There is insufficient information to answer the question.

Question

Quizplus · Accepted Answer

The value of the deposit multiplier is smaller than the value implied by the formula when banks hold excess reserves because excess reserves reduce the amount of money that banks can lend out, which in turn reduces the potential increase in the money supply through the deposit multiplier.

What Happens to the Value of the Deposit Multiplier When