Question

The money multiplier​ _______. A. decreases if banks increase their desired reserve ratio B. is 1 if the desired reserve ratio equals the currency drain ratio C. increases if the currency drain ratio increases D. increases if banks increase their desired reserve ratio

Answer 1

A. decreases if banks increase their desired reserve ratio

Explanation:

Since, the money multiplier is the amount of money produced by banks with each dollar of reserves,

In other words,

It estimates, how an initial deposit can lead to a bigger final increase in the total money supply.

For example :

If a commercial bank gains deposits of 1 crore and this leads to a final money supply of 10 crore, the money multiplier would be 10.

That is,

`\text{Money multipliers}=\frac{1}{\text{Reserve ratio}}`

`\implies \text{Money multipliers}\propto \frac{1}{\text{Reserve ratio}}`

Therefore, the money multiplier decreases if banks increase their desired reserve ratio