If the cash-drain is zero, the multiple by which the commercial banking system can expand the money supply on the basis of excess reserves is:

Question

Quizplus · Accepted Answer

The multiple by which the commercial banking system can expand the money supply on the basis of excess reserves is larger when the desired reserve ratio is smaller. This is because the reserve ratio determines the fraction of deposits banks are required to hold as reserves. A smaller reserve ratio means banks can lend out a larger portion of their deposits, thereby increasing the money supply more significantly.

If the Cash-Drain Is Zero, the Multiple by Which the Commercial