question archive Suppose the reserve requirement is 10%
Suppose the reserve requirement is 10%
Subject:EconomicsPrice:2.88 Bought3
Suppose the reserve requirement is 10%. If the Federal Reserve decreases the reserve requirement, banks can lend out
A. fewer reserves, thus increasing the money multiplier and increasing the money supply.
B. fewer reserves, thus decreasing the money multiplier and decreasing the money supply.
C. more reserves, thus increasing the money multiplier and increasing the money supply.
D. more reserves, thus decreasing the money multiplier and decreasing the money supply.
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The correct option is C. more reserves, thus increasing the money multiplier and increasing the money supply.
Explanation:
If the Federal Reserve decreases the reserve requirement rate, commercial banks have more money to lend to the people. It increases the money supply and further increases the money multiplier as increased money circulation increases its velocity of truncation.
