The larger is the reserve ratio, the:
A) smaller is the money multiplier, and the less money will be created in the economy.
B) smaller is the money multiplier, and the more money will be created in the economy.
C) larger is the money multiplier, and the less money will be created in the economy.
D) larger is the money multiplier, and the more money will be created in the economy.

Question

Quizplus · Accepted Answer

The reserve ratio represents the fraction of deposits that banks are required to hold as reserves. When the reserve ratio is larger, banks are required to hold a larger portion of deposits as reserves, which reduces the amount of money that can be lent out and subsequently multiplied in the economy. Therefore, the money multiplier is smaller, and less money will be created in the economy.

The Larger Is the Reserve Ratio, The