Assume that some people who receive bank loans do not deposit the full amount of the loan into a bank.This will cause the deposit multiplier to be ________ it would have been if all loans are deposited in banks.

Question

Quizplus · Accepted Answer

The deposit multiplier depends on the reserve ratio, which is the fraction of deposits that banks are required to keep as reserves. When people do not deposit the full amount of the loan in banks, the amount of deposits available for banks to lend will be smaller. Therefore, the reserve ratio will necessarily be higher to support the same amount of loans. Since the deposit multiplier is the reciprocal of the reserve ratio, it follows that the deposit multiplier will be smaller when the reserve ratio is higher. Hence, the answer is (D) smaller than.

Assume That Some People Who Receive Bank Loans Do Not