In the money creation process, the simple money multiplier assumes that banks ho

Question

In the money creation process, the simple money multiplier assumes that banks hold no excess reserves. What is the consequence of a bank holding excess reserves?

Choose one:

A. The simple money multiplier becomes smaller as fewer deposits are made.

B. The simple money multiplier becomes smaller as less money is loaned out.

C. The simple money multiplier initially increases but then decreases as loans are paid off.

D. The simple money multiplier becomes larger as more deposits are made.

E. The simple money multiplier becomes larger as more money is loaned out.

Explanation / Answer

The correct answer is B. As more excess reserves are held, this will mean less money is put into circulation, thus the money multiplier will be smaller. The correct answer is B.

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