Excess Reserves and the Money Multiplier
In a fractional reserve banking system, if banks choose to hold excess reserves, what is the resulting impact on the money multiplier, interest rates, and overall economic activity?
A
There is no effect on the money multiplier as long as banks meet the required reserve ratio, so interest rates remain stable.
B
The money multiplier increases, thereby expanding the money supply more and lowering interest rates to boost economic activity.
C
Holding excess reserves creates an unpredictable effect on the money supply, with interest rates and economic activity affected randomly.
D
The money multiplier decreases, which lessens the expansion of the money supply, potentially leading to higher interest rates and reduced economic activity.
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