Question
What is money drain and how does it reduce the size of deposit multiplier? I believe my professor was referring to Dollar Drain in this
What is money drain and how does it reduce the size of deposit multiplier?
I believe my professor was referring to Dollar Drain in this question. My problem is that I know that a dollar drain is a trade deficit and so that means that there is more money spent on trade then is made. I also know that the Deposit Multiplier is one divided by the reserve requirement ratio. Which RRR is further calculated by the wealth of the bank.
So I think that because the dollar drain is in effect, the Fed or the center of the USA's wealth is losing money, RRR will increase, causing the deposit multiplier to fall. I am just not confident in my answer and would like to have this logic looked over and receive confirmation that my logic is correct or have it corrected.
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