As the reserve ratio increases, which of the following happens to the money multiplier?
A)It increases.
B)It does not change.
C)It decreases.
D)It cannot be determined without additional information.

Question

Quizplus · Accepted Answer

The money multiplier is inversely proportional to the reserve ratio. As the reserve ratio increases, the money multiplier decreases. This is because a higher reserve ratio means that banks can lend out less of their deposits, which reduces the overall amount of money that can be created through the process of fractional reserve banking.

As the Reserve Ratio Increases, Which of the Following Happens