Assume that banks become more conservative in their lending policies and start holding some excess liquid assets.Compared to a situation in which banks are not holding excess reserves,the size of the deposit multiplier will be
A) larger.
B) smaller.
C) zero.
D) the same.

Question

Quizplus · Accepted Answer

When banks become more conservative in their lending policies and start holding excess liquid assets, it reduces the amount of money that can be created through the deposit multiplier effect. This is because banks cannot lend out the excess reserves, which in turn reduces the amount of money that can be created through the lending process. Therefore, the size of the deposit multiplier will be smaller in this situation compared to a situation in which banks are not holding excess reserves.

Assume That Banks Become More Conservative in Their Lending Policies