If the Fed increases the reserve ratio from 4 percent to 10 percent, then the money multiplier
A)decreases from 25 to 10.
B)decreases from 20 to 10.
C)increases from 10 to 25.
D)increases from 10 to 20.

Question

Quizplus · Accepted Answer

The reserve ratio is the fraction of deposits that banks are required to hold as reserves. If the required reserve ratio increases from 4% to 10%, banks will be required to hold a larger amount of reserves, which means they will have less funds available for lending and creating money. This decrease in the ability to create money will lead to a decrease in the money multiplier from 25 to 10.

If the Fed Increases the Reserve Ratio from 4 Percent