If the monetary authorities want to reduce the monetary multiplier, they should
A) lower the required reserve ratio.
B) raise the required reserve ratio.
C) increase bank reserves.
D) lower interest rates.

Question

Quizplus · Accepted Answer

The monetary multiplier is calculated as 1/reserve ratio. Therefore, to reduce the monetary multiplier, the required reserve ratio must be raised. This will increase the amount of reserves that banks are required to hold, reducing the amount that they can lend out, and ultimately decreasing the overall money supply. Lowering the required reserve ratio or increasing bank reserves would have the opposite effect, increasing the amount that banks can lend out and potentially increasing the money supply. Lowering interest rates may stimulate borrowing and spending, but it does not directly affect the size of the monetary multiplier.

If the Monetary Authorities Want to Reduce the Monetary Multiplier