Question

Other things being equal, if households decide to increase the amount of currency they hold per dollar of bank deposits, the money multiplier will tend to do which of the following?

Decrease
Remain unchanged
Increase
Any of the above is possible depending on the starting value of the variables in the money multiplier

Answer 1

Option (A) is correct.

Step-by-step explanation:

Money multiplier refers to the reciprocal of required reserve ratio.

The formula for determining money multiplier is as follows:

= 1 ÷ Reserve requirement ratio

If the households are desired to hold more currency in hand then as result the there will be leakage in the form of households holding cash with themselves.

Hence, this will lead to decrease the money multiplier because of higher reserve requirement ratio for the banks.