An increase in the market interest rate will increase the size of the money multiplier since

Question

Quizplus · Accepted Answer

An increase in the market interest rate will reduce the demand for loans, and as a result, banks will have excess reserves. Banks will use these excess reserves to make new loans, which will increase the money supply. Since the reserve-deposit ratio (the ratio of reserves held by banks to deposits) is inversely related to the money multiplier (the factor by which the money supply increases with new deposits), a decrease in the reserve-deposit ratio will increase the money multiplier. Therefore, choice A is the best option.

An Increase in the Market Interest Rate Will Increase the Size