Which of the following best describes the outcomes of a decrease in the reserve requirement in a fractional reserve system?
A)Both the money multiplier and the money supply increase.
B)Both the money multiplier and the money supply decrease.
C)The money multiplier increases, but the money supply decreases.
D)The money multiplier decreases, but the money supply increases.

Question

Quizplus · Accepted Answer

When there is a decrease in reserve requirements in a fractional reserve system, banks are required to hold fewer reserves, which allows them to lend out more money. This leads to an increase in the money supply, which is magnified by the money multiplier effect. The money multiplier measures the amount of money the banking system can create from each dollar of reserves, and as banks are able to lend out more money, the money multiplier increases as well. Therefore, both the money multiplier and the money supply increase in this scenario.

Which of the Following Best Describes the Outcomes of a Decrease