Which of the following would cause the actual deposit expansion multiplier to be less than its potential?
A) The general public holding of funds in the form of currency rather than bank deposits
B) The holding of excess reserves by commercial banks
C) The general public holding of funds in the form of coins rather than bills
D) Both a and b

Question

Quizplus · Accepted Answer

Both a and b. If the general public holds funds in the form of currency rather than bank deposits, banks will have fewer reserves to work with, which will limit the amount they can lend out. Similarly, if commercial banks hold excess reserves, they will have fewer funds available for lending, which will limit the potential for deposit expansion.

Which of the Following Would Cause the Actual Deposit Expansion