The money multiplier is
A) the amount by which a change in the quantity of money is multiplied to determine the change in the monetary base.
B) equal to bank reserves divided by the change in the monetary base.
C) the amount by which a change in the monetary base is multiplied to determine the change in the quantity of money.
D) equal to bank reserves divided by the change the quantity of money.

Question

Quizplus · Accepted Answer

The money multiplier is the amount by which a change in the monetary base is multiplied to determine the change in the quantity of money. This is because, when the central bank injects new money into the economy, it typically enters the banking system, which in turn can lend out a portion of the new reserves, thereby creating new deposits and increasing the money supply. The size of this lending process and hence the increase in the money supply depends on the reserve ratio, which in turn determines the money multiplier. Therefore, the money multiplier is a key concept for understanding the relationship between the monetary base and the money supply.

The Money Multiplier Is