If banks become more pessimistic about the future of the economy and increase their holdings of excess reserves, the size of the deposit multiplier will be:

Question

Quizplus · Accepted Answer

If banks increase their holdings of excess reserves, they will lend out less money, which will decrease the money supply and lead to a smaller deposit multiplier. Thus, the correct answer is B, smaller.

If Banks Become More Pessimistic About the Future of the Economy