University of Central Florida (UCF) ECO3223 Midterm 3 Practice Exam

The money multiplier is defined as the ratio of the amount of money in the banking system to the monetary base, and it is influenced by the behavior of the public regarding their currency and deposits. A higher currency-to-deposit ratio indicates that people are holding a greater proportion of their money in the form of physical currency rather than in bank deposits.

Over the last 25 years, the trend has shown that individuals are increasingly choosing to hold their wealth in the form of cash rather than deposits, which reduces the banks' ability to lend out money. This results in a lower money multiplier because a larger portion of money is retained by the public as currency and is not being converted into deposits that the banks can use to generate new loans.

In contrast, other factors that could affect the money multiplier, such as the total amount of currency available or the increase in credit card usage, do not lead to a direct decrease in the multiplier. The significant shift in how people manage their finances, particularly the inclination to hold more cash relative to deposits, explains the observed decrease in the money multiplier today.