In the 19th century,when crop failures often led to bank runs,banks would make relatively fewer loans and hold relatively more excess reserves.By itself,these actions by the banks should have
A)increased the money multiplier and the money supply.
B)decreased the money multiplier and increased the money supply.
C)increased the money multiplier and decreased the money supply.
D)decreased both the money multiplier and the money supply.

Question

Quizplus · Accepted Answer

When banks reduce the number of loans and hold more excess reserves, it leads to a decrease in the money multiplier. Money multiplier is the ratio of the money supply to the monetary base, where the monetary base consists of currency in circulation and bank reserves. As banks hold more reserves, the money multiplier decreases, leading to a decrease in the money supply. Therefore, choice D is the correct answer.

In the 19th Century,when Crop Failures Often Led to Bank