Question

If the general public decide to keep a greater proportion of their savings in their wallets...

If the general public decide to keep a greater proportion of their savings in their wallets rather than in their savings accounts in the banking sector, then the money multiplier will increase and banks can ‘create’ more money.

Correct this statement and provide for a brief example proving your case.
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Answer #1

Money multiplier = 1 / Reserve Requirement

Reserve requirement is the fixed percentage that banks keeps with them for unprecedented economic reasons.

If people hold more of their money in wallets and less in banks. Assume banks wants $5,000 as reserved with them. Banks have $100,000 with them now and they fix 5% reserve requirement. If people do not deposit their money in banks which will lower the money banks have to let say $80,000. At this, banks have to raise their reserve requirement percentage to 6.25% to meet $5,000 as reserved with them. If reserve requirement rises, it leads to fall in money multiplier and the money banks can create.

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