Which of the following would cause the money supply to increase by less than the amount indicated by the money multiplier?
A) A financial institution lends less than its increase in excess reserves.
B) A person borrowing money converts part of it to cash rather than putting it all in a demand deposit account.
C) Both of the above.
D) None of the above.

Question

Quizplus · Accepted Answer

Both A and B would cause the money supply to increase by less than the amount indicated by the money multiplier. In A, if a financial institution lends less than its increase in excess reserves, it is not fully utilizing its capacity to expand the money supply through the lending process. In B, when a person borrows money and converts part of it to cash rather than depositing it all into a demand deposit account, it reduces the base for the money multiplier effect since cash does not contribute to the creation of new deposits as directly as money deposited in banks.

Which of the Following Would Cause the Money Supply to Increase