Answer to Question #55809 in Macroeconomics for Javarn Shaw

Question

If the banks decide to hold a lower liquidity ratio, what effect will this have on the banks multiplier?

Answer 1

If the banks decide to hold a lower liquidity ratio, the banks multiplier will increase.
Liquidity ratios are financial analysis tools commonly used to gauge a company's ability to repay short-term creditors out of its cash fund. Liquidity ratios measure a company’s liquid assets against its short-term liabilities. So, in case of a lower liquidity ratio the bank will get more liabilities, that will be used to create new money by allowing to clients new loans, so the multiplier will increase.