In the nineteenth century, when there were often bank runs caused by crop failures, banks would make relatively fewer loans and hold relatively more excess reserves. By itself, which action should the banks have taken?
A) They should have increased both the money multiplier and the money supply.
B) They should have decreased the money multiplier and increased the money supply.
C) They should have increased the money multiplier and decreased the money supply.
D) They should have decreased both the money multiplier and the money supply.

Question

Quizplus · Accepted Answer

In times of bank runs and economic uncertainty, banks must take measures to ensure they can meet the demand for cash withdrawals. By making fewer loans and holding onto more excess reserves, banks can decrease both the money multiplier and the money supply, which helps ensure they have enough funds on hand to cover withdrawals. Therefore, the best choice is D - they should have decreased both the money multiplier and the money supply.

In the Nineteenth Century, When There Were Often Bank Runs