When part of a bank loan does not return to the banking system but rather remains outside the banking system as currency,then the money multiplier ________ in size and the amount of money created by an open market operation ________.
A)increases;decreases
B)does not change;increases
C)decreases;decreases
D)increases;increases
E)decreases;does not change

Question

Quizplus · Accepted Answer

The money multiplier relationship is affected by the currency drain ratio. The currency drain ratio is the fraction of a new deposit that is held as currency instead of being deposited back into the banking system. If part of a bank loan does not return to the banking system as currency, the currency drain ratio increases, which causes the money multiplier to decrease. Therefore, less money is created by an open market operation.

When Part of a Bank Loan Does Not Return to the Banking