Suppose banks hold no customary reserves and every time a loan is made, it is ta

Question

Suppose banks hold no customary reserves and every time a loan is made, it is taken in cash and not redeposited in the banking system. Under these circumstances, the: A) M2 multiplier equals 0 B) M2 multiplier equals 1 C) M2 multiplier is greater than 1 D) M2 multiplier is less than 1 Suppose banks hold no customary reserves and every time a loan is made, it is taken in cash and not redeposited in the banking system. Under these circumstances, the: A) M2 multiplier equals 0 B) M2 multiplier equals 1 C) M2 multiplier is greater than 1 D) M2 multiplier is less than 1 A) M2 multiplier equals 0 B) M2 multiplier equals 1 C) M2 multiplier is greater than 1 D) M2 multiplier is less than 1

Explanation / Answer

Solution: M2 multiplier is less than 1

Explanation: Money multiplier equals money supply / money base; thus when loans are not redeposited in the banking system it will be less than 1

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