Multiple Choice QuestionThe _______ , the smaller the money multiplier. Multiple choice question.larger the reserve requirementlarger the demand for moneysmaller the supply of moneysmaller the interest rate
Question
Multiple Choice QuestionThe _______ , the smaller the money multiplier. Multiple choice question.larger the reserve requirementlarger the demand for moneysmaller the supply of moneysmaller the interest rate
Solution
The correct answer is "larger the reserve requirement".
Here's why:
The money multiplier is a measure of the amount of money that banks generate with each dollar of reserves. The formula for the money multiplier is 1 / Reserve Requirement.
So, if the reserve requirement is larger, the denominator in this formula becomes larger. When the denominator in a fraction becomes larger, the overall value of the fraction (and thus the money multiplier) becomes smaller.
Therefore, the larger the reserve requirement, the smaller the money multiplier.
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