Which of the following best describes the consequences of a decrease in the reserve requirements 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

A decrease in the reserve requirements means that banks are required to hold less money in reserve and can lend out more. This leads to an increase in the money multiplier, as banks can create more loans for every dollar held in reserve. As a result, the money supply increases as well.

Which of the Following Best Describes the Consequences of a Decrease