Question

If banks are holding relatively more reserves, are they lending out relatively less than before, thus giving rise to the value of the money multiplier?

1) True
2) False

Answer 1

The statement is false. When banks hold more reserves, they are actually able to lend out more money, increasing the money multiplier.

Step-by-step explanation:

The statement is 2) False. When banks hold relatively more reserves, they are actually able to lend out relatively more money, which increases the value of the money multiplier.

The money multiplier is defined as the quantity of money that the banking system can generate from each $1 of bank reserves. It is calculated as 1 divided by the reserve ratio.

When banks hold more reserves, they have more funds available to lend out, leading to an increase in the money supply and the value of the money multiplier.