When part of a bank loan does not return to the banking system but rather remains outside the banking system as currency,then the money multiplier ________ in size and the amount of money created by an open market operation ________.
A)increases;decreases
B)decreases;does not change
C)does not change;increases
D)increases;increases
E)decreases;decreases

Question

Quizplus · Accepted Answer

When part of a bank loan remains outside the banking system as currency, the money multiplier decreases because there is less money being re-deposited and re-loaned within the banking system. Consequently, the amount of money created by an open market operation also decreases.

When Part of a Bank Loan Does Not Return to the Banking