Question

Which of the following may cause the money multiplier to increase?

Select one:

a. The Fed sells government bonds

b. The Fed increases the reserve requirement

c. The Fed decreases the interest rate on bank deposits held at the Fed

d. The Fed buys government bonds

e. The Fed increases the interest rate on bank deposits held at the Fed

Answer 1

In the following option which are given here the appropriate option which may cause the money multiplier to increase is:
Option c that is the fed decreases the interest rate on Bank deposits held at the fed because if there is an decrease in the interest rate on Bank deposit then the reserves will decrease when reserve will decrease then as for the formula it will increases the money multiplier. Because people prefer to invest in other options rather to kept reserves in the bank.
Money multiplier =initial deposit*1/LRR
As per the formula if the legal reserve ratio decreases it means that it will impact indirectly on the money multiplier and with this effect it will also decrease.
Option a means the fed sells Government Bonds the selling of Government Bonds is not related to do the Reserve increase or decrease in the bank so that the only reason this option is not at all applicable.
Option B means the fed increases the Reserve Requirement so if the Reserve Requirement will increase then it will decreases the value of money multiplier.
Option d is also not related with the reserves so that’s only reason it is not applicable.
Option e this option is just opposite of option C so it is a contradict of the correct the statement that’s why it is not applicable.