Other things equal, if the required reserve ratio was lowered,
A) banks would have to reduce their lending.
B) the size of the monetary multiplier would increase.
C) the actual reserves of banks would increase.
D) the federal funds interest rate would rise.

Question

Quizplus · Accepted Answer

Lowering the required reserve ratio would mean that banks have to hold fewer reserves and hence can lend out more money. This increases the size of the monetary multiplier, which determines the amount of money supply that can be generated from a given amount of reserves. Option A is incorrect because banks will have more funds to lend, not less. Option C is incorrect because the actual reserves of banks will decrease. Option D is incorrect because a decrease in the required reserve ratio is unlikely to have an effect on the federal funds interest rate.

Other Things Equal, If the Required Reserve Ratio Was Lowered