What will happen when banks decide to increase their reserve ratios?
A) The money supply will not change.
B) The money supply might expand or contract.
C) The money supply will expand.
D) The money supply will contract.

Question

Quizplus · Accepted Answer

When banks decide to increase their reserve ratios, they keep more money as reserves, reducing the amount of money available to lend out. This means that the banks’ ability to create new money decreases, reducing the overall money supply. Therefore, the money supply will contract.

What Will Happen When Banks Decide to Increase Their Reserve