A reduction in the legal reserve requirement will, other things equal,
A)reduce the depositors' incentive to run the banks
B)reduce the amount of funds available for lending
C)induce the banks to buy back their stocks
D)increase the amount of lending by banks
E)both b and c

Question

Quizplus · Accepted Answer

When the legal reserve requirement is reduced, banks are required to hold less funds in reserve and can therefore lend out more money. This increase in lending can boost the economy by increasing investment and consumption. Option A is incorrect because a reduction in reserve requirement does not affect customer behavior. Option B is incorrect because it's the opposite of what actually happens. Option C is also incorrect because a reduction in reserve requirement does not necessarily lead to stock buybacks. Option E is incorrect because both options are not correct.

A Reduction in the Legal Reserve Requirement Will, Other Things