Answer to Question #118663 in Macroeconomics for Karan Bhanot

Question

What happens to the money multiplier and reserve ratio during the financial crisis? Which one increase or decrease explain without 100 words

Answer 1

• The money multiplier is the amount of money that banks generate with each dollar of reserves. Reserves is the amount of deposits that the banks hold and not lend.

• The size of the multiplier depends on the percentage of deposits that banks are required to hold as reserves. 

• When the reserve requirement decreases the money multiplier increases and vice versa.

• In a financial crises investors sell off their assets or withdrawal money from their savings accounts, business and consumers are unable to pay their debts this increases reserve requirement or reserve ratio by the bank thus decreasing money multiplier.