What Happens to the Value of the Deposit Multiplier When

question 29

Multiple Choice

What happens to the value of the deposit multiplier when banks hold excess reserves?

• A) It is larger than the value implied by the formula.
• B) It is smaller than the value implied by the formula.
• C) It is only affected by the amount of loans that banks are willing to make, not the amount of excess reserves held.
• D) There is insufficient information to answer the question.

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Definitions:

Phillips Curve

An economic theory that suggests an inverse relationship between the rate of inflation and the unemployment rate.

Aggregate Demand

The overall requirement for products and services in an economic setting, identified at a specific price level and time period.

Short-Run Aggregate Supply

The total supply of goods and services that firms in an economy plan on selling during a short-term period, assuming some input prices are fixed.

Inflation

A sustained increase in the general price level of goods and services in an economy over a period of time, leading to a decrease in the currency’s purchasing power.