Answer:
A. larger if banks hold on to excess reserves but smaller if private citizens hold on to cash.
Explanation:
The multiplier effect refers to the proportional amount of increase in final income that results from an injection of spending. Alternatively, a multiplier effect can also work in reverse, showing a proportional decrease in income when spending falls. Generally, economists are usually the most interested in how capital infusions positively affect income. Most economists believe that capital infusions of any kind, whether it be at the governmental or corporate level, will have a broad snowball effect on various aspects of economic activity
The primary factor is the bank's perception of risk. ... But, if banks feel that a lot of people may come in and request their money, it might cause a “run on the bank” so they have to reduce their lending in order to have enough cash on hand to avoid that. This will reduce the money multiplier.
Money Multiplier and Reserve Ratio. Money Multiplier refers to how an initial deposit can lead to a bigger final increase in the total money supply. For example, if the commercial banks gain deposits of £1 million and this leads to a final money supply of £10 million. The money multiplier is 10.
