In the previous question, one example assumed that banks kept a 100% reserve ratio. Some economists have recommended that all banks be required by law to keep 100% of their deposits in the bank vault, at the Federal Reserve, or invested in ultra safe investments such as short-term U.S. Treasury bills.
a. If this happened, what would be money multiplier be equal to?
b. If this happened, would the interest rate on bank deposits probably go up or down?
c. If this happened, would people be more likely or less likely to invest their savings in bank alternatives, such as bonds, mutual funds, or their cousin’s lawn mowing business?