An increase in the currency drain ratio
A)increases the size of the money multiplier.
B)decreases the size of the money multiplier.
C)increases the deposits in all banks.
D)decreases the size of the monetary base.
E)increases the size of the monetary base.

Question

Quizplus · Accepted Answer

The currency drain ratio is the fraction of currency held by the public, which is not deposited in banks. An increase in the currency drain ratio means that a larger portion of the money supply is held as currency outside the banking system, which reduces the amount of money available for banks to lend out. Therefore, a higher currency drain ratio decreases the size of the money multiplier, which is the ratio between the increase in the money supply and the increase in the monetary base.

An Increase in the Currency Drain Ratio