The larger the public's currency drain from the banking system, the
A) larger is the money multiplier.
B) smaller is the money multiplier.
C) larger is the monetary base.
D) smaller is the monetary base.

Question

Quizplus · Accepted Answer

The money multiplier is the ratio of the change in the money supply to the change in the monetary base. When the public withdraws currency from the banking system, it reduces the amount of reserves that banks hold, which in turn reduces the monetary base. A smaller monetary base leads to a smaller money multiplier, as there is less potential for new money creation through the lending process.

The Larger the Public's Currency Drain from the Banking System