In February, 2010 the U.S. M1 money multiplier crashed to 0.786. Each $1 increase in the monetary base resulted in the quantity of money increasing by only $0.79. Where did the remaining $0.21 disappear?
A) Banks held part of the $0.21 as unplanned reserves.
B) Banks loaned out the $0.21.
C) Consumers held part of the $0.21 as currency.
D) Both A and C are correct.

Question

Quizplus · Accepted Answer

The remaining $0.21 did not disappear but was held in two forms: as unplanned reserves by banks (A) and as currency by consumers (C). This means that not all of the increase in the monetary base was multiplied through the banking system into a larger increase in the money supply, reflecting a lower money multiplier.