If the Fed were to reduce the legal reserve ratio, we would expect
A) lower interest rates, an expanded GDP, and a higher rate of inﬂation.
B) lower interest rates, an expanded GDP, and a lower rate of inﬂation.
C) higher interest rates, a contracted GDP, and a higher rate of inﬂation.
D) higher interest rates, a contracted GDP, and a lower rate of inﬂation.

Question

Quizplus · Accepted Answer

Reducing the legal reserve ratio allows banks to lend more of their deposits, which increases the money supply. This typically leads to lower interest rates, stimulating borrowing and spending, which can expand GDP. However, the increased money supply can also lead to higher inflation rates.

If the Fed Were to Reduce the Legal Reserve Ratio