The ________ the amount of excess reserves a bank holds, the ________ the size of the deposit multiplier.
A)greater; larger
B)greater; smaller
C)smaller; smaller
D)smaller; greater likelihood there is no change in

Question

Quizplus · Accepted Answer

The deposit multiplier is calculated as 1/required reserve ratio. As excess reserves increase, banks become less reliant on borrowing from the federal reserve and therefore are less likely to create new loans. This decreases the overall money supply and decreases the deposit multiplier. Conversely, less excess reserves result in more loans and a larger money supply, which increases the deposit multiplier.

The ________ the Amount of Excess Reserves a Bank Holds