In the special case of the 100-percent-reserve banking, the money multiplier is

Question

a. 1 and banks create money.
b. 2 and banks create money
c. 2 and banks do not create money.
d. 1 and banks do not create money.

Answer 1

In the case of 100-percent-reserve banking, banks hold all deposits as reserves and do not lend any portion of deposits out. Therefore, the money multiplier is 1, and banks do not create additional money beyond the money that has been deposited.

The correct answer is:

d. 1 and banks do not create money.