CFA Level I · CFA Level I Exam · Monetary Policy
Compared with a fractional reserve banking system with a low reserve requirement, the money multiplier is most likely to be smaller when:
The multiplier is most likely smaller when the public holds more currency outside banks. That cash leaks from the banking system and cannot be redeposited and lent again, reducing deposit creation. Lower reserve requirements or fuller lending of excess reserves would instead raise the multiplier.
- Abanks lend out a larger share of their excess reserves
- Bthe public holds more of its money as currency outside banksCorrect
- Cthe central bank lowers the reserve requirement
Explanation
Cash held outside banks is a leakage that does not return as deposits, so less lending is supported and the multiplier shrinks. Greater lending of excess reserves or a lower reserve requirement raises the multiplier.
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