If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will:
A) increase by $1 million.
B) decrease by $1 million.
C) increase by more than $1 million.
D) decrease by more than $1 million.

Question

Quizplus · Accepted Answer

If the reserve-deposit ratio is less than one, then the money multiplier is greater than one. The money supply will increase by the monetary base times the money multiplier. Therefore, if the monetary base increases by $1 million, and the money multiplier is say 2, then the money supply will increase by $2 million.

If the Reserve-Deposit Ratio Is Less Than One, and the Monetary