During recessions, banks typically choose to hold more excess reserves relative to their deposits. Which statement best describes the effects of the increase in reserves?
A) The money multiplier increases, and the money supply increases.
B) The money multiplier decreases, and the money supply decreases.
C) The money multiplier does not change, but the money supply increases.
D) The money multiplier does not change, but the money supply decreases.

Question

Quizplus · Accepted Answer

When banks hold more excess reserves, the amount of money available for lending decreases, which decreases the money multiplier. This in turn leads to a decrease in the money supply. Therefore, option B is the correct answer.

During Recessions, Banks Typically Choose to Hold More Excess Reserves