A reduction in the reserve ratio,θ,will cause

Name: A reduction in the reserve ratio,θ,will cause
Brand: Quizplus
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Question

Quizplus · Accepted Answer

A reduction in the reserve ratio (θ) leads to an increase in the excess reserves of banks. This, in turn, increases the amount of money they can create through lending, leading to an increase in the money supply. The money multiplier is calculated as 1/θ, so a decrease in θ results in an increase in the money multiplier. Therefore, the correct answer is (C) an increase in the money multiplier.

A Reduction in the Reserve Ratio,θ,will Cause