Suppose the M1 multiplier is currently 2.23 and the M2 multiplier is currently 7.95. If banks decide to increase the ratio of excess reserves they hold relative to the amount of transaction accounts they hold, how will the multipliers for M1 and M2 be affected (in qualitative, not quantitative, terms)?
What will be an ideal response?
The increase in the ratio of excess reserves to transaction accounts causes an increase in the denominator of both the M1 and M2 multipliers, causing the multipliers to decline.
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