Given a 25 percent desired reserve ratio, assume the chartered banking system is loaned up.Now assume the desired reserve ratio falls to 20 percent.As a result of this reduction:
A)we can expect bank lending and bank profits to decline.
B)each dollar of bank reserves will now support a maximum of $5 of demand deposits.
C)the banking system must now reduce outstanding loans by 5 percent.
D)the banking system can now increase lending by 5 percent.

Question

Quizplus · Accepted Answer

When the reserve ratio decreases from 25% to 20%, each dollar of reserves can support more demand deposits. Specifically, with a 20% reserve ratio, $1 of reserves can support $5 of demand deposits (1/0.20 = 5).

Given a 25 Percent Desired Reserve Ratio, Assume the Chartered