The ________ the amount of excess reserves a bank holds, the ________ the size of the deposit multiplier.

The correct completion of the sentence is: "The larger the amount of excess reserves a bank holds, the smaller the size of the deposit multiplier."

Explanation:

This relationship can be understood through the concept of the deposit multiplier in banking. The deposit multiplier reflects how much the money supply increases with an increase in reserves. When a bank holds excess reserves, it has less incentive to lend out or invest those funds, thereby reducing the potential multiplication effect in the banking system. Conversely, if a bank holds fewer excess reserves, it is more likely to use those funds for loans, thereby increasing the deposit multiplier and enabling a greater expansion of the money supply through the lending process.

In essence, a larger amount of excess reserves means that banks are not engaging as much in lending, which yields a smaller multiplier effect on the economy.