For each of the following changes, decide whether it would cause the money multi

Question

For each of the following changes, decide whether it would cause the money multiplier (m)to increase or decrease (NOTE: in most cases you will have to first think in terms of how the chan would affect ER/D or C/D or ro, and then decide how the change in that variable would affect t money multiplier). Strong economic growth increases income and wealth The Fed raises the required reserve ratio Congress eliminates the FDIC and there is no more deposit insurance The Trump administration significantly raises marginal tax rates The Fed stops paying interest on excess reserves held by banks at the Fed | Select One Banks significantly increase the interest rate they pay on demand deposits Select One increase decrease increase decrease

Explanation / Answer

a) when the fed stopped paying interest on excess reserve the reserve amount kept by the banks will decrease and it will increase the money supply in the market. Increased money supply will "increase" the money multiplier.

b) With an increased return on the interest rate, the demand deposit with banks will increase. It will "decrease" the money multipier in the market.

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