Final answer:
The money multiplier in the US is affected by the willingness of banks to lend during normal times and recessions. During normal times, banks are more willing to lend, leading to a higher money multiplier. However, during a recession, banks become more cautious and hold a higher proportion of reserves, resulting in a lower money multiplier. This reduces the amount of credit created in the economy.
Step-by-step explanation:
The money multiplier is a concept in macroeconomics that determines the amount of money and credit in an economy. During normal times, when the economy is doing well, banks and financial institutions are more willing to lend money, and people and firms are eager to borrow. This leads to an increase in lending, which in turn increases economic growth. However, during a recession, banks become less willing to lend, and credit becomes expensive or unavailable to many borrowers. This reduction in lending worsens the economic downturn.
The difference in the money multiplier during normal times and during a recession primarily lies in the willingness of banks to lend. During normal times, banks are more willing to lend, resulting in a higher money multiplier. Conversely, during a recession, banks become more cautious and hold a higher proportion of reserves to protect themselves from potential loan defaults. This reduces the money multiplier as fewer loans are made and less credit is created.
For example, during normal times, banks may have a reserve requirement of 10% and hold minimal extra reserves. This means that for every $1 deposited in a bank, the bank can lend out $9, resulting in a money multiplier of 10. However, during a recession, banks may increase their reserve requirement to 20% and hold extra reserves. This means that for every $1 deposited, the bank can only lend out $4, resulting in a lower money multiplier of 5.