Question

F banks kept 100 percent of deposits on hand as reserves, the reserve requirement ratio:

A. would be 0 and the multiplier would be 1.
B. and the multiplier would be 1.
C. would be 1 and the multiplier would be 0.
D. and the multiplier would be 0.

Banks would:
A. have to lend money.
B. have to borrow money.
C. be able to create too much new money.
D. not be able to create new money.

Answer 1

Option (B) is correct.

Option (D) is correct.

Step-by-step explanation:

If banks kept 100 percent of deposits on hand as reserves, then this will indicate that all the deposited amount would be saved as reserves. Therefore, the reserve requirement ratio is 100% here which means that:

Reserve ratio = 100%

= 100 ÷ 100

= 1

and the money multiplier = 1 ÷ reserve requirement ratio

= 1 ÷ 1

= 1

Banks would not be able create new money by giving loans because the reserve requirement ratio is 100%.