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 less money is loaned out.
B. The simple money multiplier becomes smaller as fewer deposits are made.
C. The simple money multiplier becomes larger as more deposits are made.
D. The simple money multiplier initially increases but then decreases as loans are paid off.
E. The simple money multiplier becomes larger as more money is loaned out.

Answer 1

Answer:

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

Explanation:

The multiplier becomes smaller because less money is loaned out, not because fewer deposits are made.

Answer 2

Answer:

The correct answer is B

Explanation:

Money creation process is the procedure of a natural feature having a fractional-reserve banking which happen as banks will act as both financial intermediaries and the safe keepers of deposits for making loans.

Under this process, if banks will hold the excess reserve, then this will lead to less circulation of the money in the market, which will result into the less or smaller money multiplier.