If the monetary authorities want to lower the size of the money multiplier, they should:
A)ask chartered banks to lower their desired reserve ratio.
B)ask chartered banks to raise their desired reserve ratio.
C)take actions to increase bank reserves.
D)do none of the above.

Question

Quizplus · Accepted Answer

The money multiplier is the inverse of the reserve requirement ratio. Therefore, if the monetary authorities want to lower the size of the money multiplier, they should ask chartered banks to raise their desired reserve ratio. This will decrease the amount of deposits that banks can create for a given amount of reserves, resulting in a smaller money multiplier. Option A, asking banks to lower their desired reserve ratio, would have the opposite effect and increase the money multiplier. Option C, taking actions to increase bank reserves, could potentially increase the money multiplier if the reserve requirement ratio stays the same. Option D, doing none of the above, may not necessarily result in a change in the money multiplier.

If the Monetary Authorities Want to Lower the Size of the Money