Question

Everything else held constant, a decrease in the required reserve ratio on checkable deposits causes the M1 money multiplier to ________ and the money supply to ________. a) increase; increase b) increase; decrease c) decrease; increase d) decrease; decrease

Answer 1

Answer:

The correct answer is (A)

Explanation:

The size of the multiplier relies upon the level of reserves banks are required to hold in the bank. Reserve ratio is the amount of money bank is needed to keep as a reserve to increase bank liquidity. Reserve requirement and money multiplier have a negative association; a decrease in reserve requirement will increase the money multiplier. An increase in money multiplier will increase the overall money supply in the economy.