A decrease in the required reserve ratio will:
A) reduce commercial bank loans and reduce the money supply.
B) increase commercial bank loans and reduce the money supply.
C) increase commercial bank loans and increase the money supply.
D) decrease commercial bank loans and increase the money supply.

Question

Quizplus · Accepted Answer

When the required reserve ratio is decreased, commercial banks are required to hold fewer reserves against their deposits. This means that they have more funds available to lend out to borrowers. As a result, the amount of commercial bank loans increases, which in turn increases the money supply. Therefore, the correct answer is C) increase commercial bank loans and increase the money supply.

A Decrease in the Required Reserve Ratio Will