Which of the following statements BEST describes why a decrease in reserve requirements often results in an increase in the money supply?
A) A decrease in reserve requirements gives banks more money to better determine their interest rates.
B) A decrease in reserve requirements gives banks more money to pay off their debts.
C) A decrease in reserve requirements gives banks more money to lend out.
D) A decrease in reserve requirements gives banks more money to offset lower interest rates.
E) A decrease in reserve requirements gives banks more money to reward their employees for meritorious financial ventures.

Question

Quizplus · Accepted Answer

Reserve requirements refer to the amount of money that banks are required to hold in reserve by the central bank. When reserve requirements are decreased, banks have more money available to lend out, leading to an increase in the money supply. This is because the creation of loans by banks results in new money being added to the economy, as borrowers use the newly created funds to make purchases and pay bills. Therefore, choice C, which states that a decrease in reserve requirements gives banks more money to lend out, best describes why it leads to an increase in the money supply.

Which of the Following Statements BEST Describes Why a Decrease