If households' and businesses' desired holding ratio of currency-to-deposits increases,
A) the value of the autonomous spending multiplier will decrease.
B) the value of the money multiplier will increase.
C) the value of the money multiplier will decrease.
D) the value of the money multiplier will not change.

Question

Quizplus · Accepted Answer

When households and businesses desire to hold more currency relative to deposits, it means that a larger portion of the monetary base is held as currency rather than deposited in banks. This reduces the amount of reserves available to support the creation of new deposits through the banking system's lending activities, effectively decreasing the money multiplier. The money multiplier is inversely related to the currency-to-deposit ratio; as the ratio increases, the multiplier decreases.

If Households' and Businesses' Desired Holding Ratio of Currency-To-Deposits Increases