If the banking system's money multiplier is 4, then a $2,000 increase in checkable deposits when banks hold excess reserves will result in which of the following events?
A) The money supply will not change.
B) The money supply will increase by less than $8,000.
C) The money supply will increase by exactly $8,000.
D) The money supply will increase by more than $8,000.

Question

Quizplus · Accepted Answer

When banks hold excess reserves, they do not lend out all of the deposits, which means the full potential of the money multiplier is not realized. Therefore, the increase in the money supply will be less than the maximum possible $8,000.

If the Banking System's Money Multiplier Is 4, Then a $2,000