As the reserve ratio increases, what happens to the money multiplier and money supply?
A) The money multiplier increases, but the money supply does not change.
B) The money multiplier does not change, but the money supply increases.
C) The money multiplier and the money supply both increase.
D) The money multiplier and the money supply both decrease.

Question

Quizplus · Accepted Answer

When the reserve ratio increases, banks have to hold back more money and are able to lend out less, which reduces the money multiplier. As a result, the money supply decreases because there is less money available for lending and spending.

As the Reserve Ratio Increases, What Happens to the Money