Chapter 25, Problem 4MCQ

To determine

The correct option that defines the banking regulations.

Answer to Problem 4MCQ

Option c is correct.

Explanation of Solution

Explanation for correct option:

c.

If people hold back the excessive cash then money supply expansion will be hindered. This is because bank won’t be able to lend out more deposits if cash is kept by the customers. This will reduce the size of money multiplier if checkable deposits are reduced. Therefore, option c is correct.

Explanation for incorrect option:

a.

If required reserve ratio is reduced then multiplier will be increased as there is an inverse relationship between the two. Therefore, option a is incorrect.

b.

If excess reserve is reduced then also the amount that bank can lent out will increasewhich means money supply will increase. Therefore, option b is incorrect.

d.

Decrease in bank runs depicts the health banking sector which means money supply will keep on increasing as depositors are making additional deposits. Therefore, option d is incorrect.

e.

If deposit insurance increases then depositors faith with the banking deposits are increasing which means expansion in money supply. Therefore, option e is incorrect.

Economics Concept Introduction

Money multiplier: Money multiplier can be referred as the ratio between money supply and the monetary base.