An increase in the reserve ratio:

Question

increases the size of the spending income multiplier

decreases the size of the spending income multiplier

increases the size of the monetary multiplier

decreases the size of the monetary multiplie

Answer 1

An increase in the reserve ratio decreases the size of the monetary multiplier.

Here's a brief explanation:

The monetary multiplier is calculated as \( \frac{1}{\text{reserve ratio}} \). When the reserve ratio increases, the denominator of this fraction increases, resulting in a smaller multiplier. This means that banks are required to hold a larger portion of deposits as reserves, which reduces their ability to lend out money. Consequently, the overall money supply in the economy is affected, leading to a decrease in the monetary multiplier.

Therefore, the correct answer is:

decreases the size of the monetary multiplier.