Economics · Monetary Policy
Consider a situation in which commercial banks completely refrain from extending credit, even though they continue to hold deposits. In such a scenario, what would be the most appropriate implication for the money multiplier in the economy?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The money multiplier remains unchanged, while only the level of money supply declines.
- 2The money multiplier turns negative due to contraction in broad money supply.
- 3The money multiplier converges to unity, reflecting the absence of credit expansion.✓
- 4The money multiplier collapses to zero as no deposit creation takes place.
Correct answer
The money multiplier converges to unity, reflecting the absence of credit expansion.
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