Why Does the Holding of Excess Reserves by Banks and the Holding

question 44

Essay

Why does the holding of excess reserves by banks and the holding of currency by households and firms cause the real-world deposit multiplier to be less than the simple deposit multiplier?

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Definitions:

Covariance

Covariance is a measure that indicates the extent to which two random variables change in tandem. A positive covariance means that the variables tend to move in the same direction, while a negative covariance means they move inversely.

Least Squares Line

A straight line that minimizes the sum of the squares of the differences between observed and theoretical values.

Scatter Diagram

A graphical representation of two variables that shows how much one variable is affected by another by displaying data points on a horizontal and vertical axis.

Linearly Related

Describes the direct proportional relationship between two variables, where a change in one variable is associated with a consistent change in another.