If banks and the private sector decide to hold less cash, the ___________ will be larger.

Question

Quizplus · Accepted Answer

When banks and the private sector decide to hold less cash, they tend to deposit more money into the banking system. This increases the reserves of the banks, allowing them to lend out more money. The process of lending and re-depositing can increase the total money supply in the economy through the money supply multiplier effect. The money supply multiplier is essentially the amount of money that banks generate with each dollar of reserves. Therefore, if banks and the private sector hold less cash, the money supply multiplier will be larger because more money is being cycled through the banking system, amplifying the initial deposit into a larger increase in the total money supply.

If Banks and the Private Sector Decide to Hold Less