If banks have no excess reserves, and the required reserve ratio is raised, the amount that banks can lend is:
A) reduced and the money supply contracts.
B) reduced and the money supply expands.
C) reduced and there is no change in the money supply.
D) increased and the money supply expands.

Question

Quizplus · Accepted Answer

If banks have no excess reserves and the required reserve ratio is raised, banks will need to hold a larger proportion of their deposits as reserves, leaving them with less to lend out. This will lead to a reduction in the amount that banks can lend out, and ultimately a contraction of the money supply.

If Banks Have No Excess Reserves, and the Required Reserve