If the reserve-deposit ratio is less than 1, and the monetary base increases by $1 million, then the money supply will:
A)increase by $1 million.
B)decrease by $1 million.
C)increase by more than $1 million.
D)decrease by more than $1 million.

Question

Quizplus · Accepted Answer

If the reserve-deposit ratio is less than 1, it means that banks are not holding a full reserve against their deposits. Therefore, when the monetary base increases by $1 million, banks can use this additional reserve to create more money through lending. The amount of money created will be higher than $1 million, depending on the money multiplier (which is the reciprocal of the reserve-deposit ratio). Therefore, the money supply will increase by more than $1 million.

If the Reserve-Deposit Ratio Is Less Than 1, and the Monetary