When the required reserve ratio is changed,
A) the money multiplier is changed but the amount of excess reserves in the banking system is unchanged.
B) the money multiplier is unchanged but the amount of excess reserves in the banking system is changed.
C) the size of the money multiplier and the amount of excess reserves change in the opposite direction from the required reserve ratio.
D) the size of the money multiplier and the amount of excess reserves change in the same direction as the required reserve ratio.

Question

Quizplus · Accepted Answer

When the required reserve ratio is changed, the size of the money multiplier and the amount of excess reserves change in the opposite direction from the required reserve ratio. This is because when the reserve ratio is lowered, banks are required to hold less in reserves, which means they have more excess reserves to loan out, increasing the money multiplier. Conversely, when the reserve ratio is raised, banks are required to hold more in reserves, reducing the amount of excess reserves available to loan out and decreasing the money multiplier.

When the Required Reserve Ratio Is Changed