Question

Which of the following raise the money multiplier?

People want to hold less currency relative to deposits, or banks want to hold more excess reserves relative to deposits.
		People want to hold less currency relative to deposits, or banks want to hold fewer excess reserves relative to deposits.
		People want to hold more currency relative to deposits, or banks want to hold more excess reserves relative to deposits.
		People want to hold more currency relative to deposits, or banks want to hold fewer excess reserves relative to deposits.

Answer 1

The money multiplier describes how an initial deposit leads to a greater final increase in the total money supply. Also known as “monetary multiplier,” it represents the largest degree to which the money supply is influenced by changes in the quantity of deposits.

The formula of money multiplier is =Change in total money supply / Change in total monetary base

According to the question ....Firstly .whenFi people prefer less currency relative to deposits it's increases the value of multiplier because more the deposits more will be the value of the money multiplier. Because banks lends money with keep a fixed rate of reserves generally from 10 to 20%. Thats why when the deposits increases the money supply incr see it's increases the value of money multiplier on the other hand.

Secondly , when banks increases the value of reserves what will happen to the money multiplier. Here the value of the multiplier decreses . Money multiplier=1/RRR...RRR is reserve ratio. If you had a reserve ratio of 5%. You would expect a money multiplier of 1/0.05 = 20... similarly according to the question if the bank increases the reserves to 8% the value of the multiplier would be 1/0.08=12.5 ..here we clearly see when bank reserves increases the value of the money multiplier decreses.