When the required reserve ratio is changed,
A) the money multiplier is changed but the amount of excess reserves in the banking system is unchanged.
B) the money multiplier is unchanged but the amount of excess reserves in the banking system is changed.
C) the size of the money multiplier and the amount of excess reserves change in the opposite direction from the required reserve ratio.
D) the size of the money multiplier and the amount of excess reserves change in the same direction as the required reserve ratio.
E) neither the money multiplier nor the amount of excess reserves change.

Question

Quizplus · Accepted Answer

The money multiplier is inversely related to the required reserve ratio, so a change in the required reserve ratio changes the money multiplier. The amount of excess reserves changes in the opposite direction because banks hold more or less reserves depending on the required reserve ratio.

When the Required Reserve Ratio Is Changed