Suppose the Fed increases required reserves from 10% to 20% of deposits. Assuming that banks are fully loaned-up, the money supply will _____ and the value of the money multiplier will _____ to _____.
A) rise; fall; 10
B) fall; rise; 2
C) rise; rise; 4
D) fall; fall; 5

Question

Quizplus · Accepted Answer

When the Fed increases the required reserve ratio, banks must hold more reserves and can lend out less, leading to a decrease in the money supply. The money multiplier is calculated as 1 divided by the reserve ratio, so increasing the reserve ratio from 10% to 20% decreases the multiplier from 10 to 5.

Suppose the Fed Increases Required Reserves from 10% to 20