If the desired reserve ratio falls:
A)banks would be prompted to reduce their lending.
B)the size of the money multiplier would increase.
C)the actual reserves of banks would increase.
D)none of the above would occur.

Question

Quizplus · Accepted Answer

When the desired reserve ratio falls, banks will have excess reserves that they could use to lend out more money, which increases the size of the money multiplier. Therefore, choice B is correct. Option A is incorrect because banks won't be prompted to reduce their lending since they have excess reserves. Option C is also incorrect because the actual reserves would have already been lowered due to the reduction in the desired reserve ratio.

If the Desired Reserve Ratio Falls