April 2011 Q 23: Effect of cash machines on L

[maz1987]

The use of debit cards and cash withdrawal machines will have the following effect on a bank:

A Lower the bank’s liquidity ratio and increase the bank deposits multiplier.
B Increase the bank’s liquidity ratio and lower the bank deposits multiplier.
C Lower the bank’s liquidity ratio and leave the bank deposits multiplier
unchanged.
D The effect on the bank’s liquidity ratio and the bank deposits multiplier will be uncertain.

Why is the answer D?

I would have thought the use of cash withdrawl machines would mean the bank has to have a higher liquidity ratio in order to satisfy the increase in demand for cash (with cash machines making withdrawl easier, demand for cash would increase). This would also mean the bank multiplier reduces.

 

[freddie]

I think this is a dodgy question. It seems to come from a Pause for Thought question on page 638 of the textbook. The answer given on the textbook's website is that debit cards reduce the need for cash and cash machines increase the need for cash, therefore the effect on the liquidity ratio is uncertain.

However, this conflicts with what is said at the bottom of page 640. There it says that debit cards and cash machines both increase the need for cash. (It is credit cards that reduce the need for cash.) Following this logic, the answer would be B.