-The effect of an increase in required reserves on interest rates and the amount of loans made is shown by the movement from:
A) D1 to D2 in Figure A.
B) D1 to D2 in Figure B.
C) S1 to S2 in Figure C.
D) S1 to S2 in Figure D.

Question

-The effect of an increase in required reserves on interest rates and the amount of loans made is shown by the movement from:
A) D1 to D2 in Figure A. 
B) D1 to D2 in Figure B. 
C) S1 to S2 in Figure C. 
D) S1 to S2 in Figure D.

Quizplus · Accepted Answer

An increase in required reserves decreases the amount of funds banks have available to lend, effectively reducing the supply of loanable funds. This reduction in supply, without a change in demand, leads to higher interest rates and fewer loans made. This is represented by a leftward shift of the supply curve from S1 to S2 in a supply and demand model of the loanable funds market, which is what option D describes.

-The Effect of an Increase in Required Reserves on Interest