A decrease in reserve requirements lowers the reserve ratio, raises the money multiplier and increases the money supply.

Question

Quizplus · Accepted Answer

Decreasing reserve requirements means that banks are required to hold less money in reserve and can lend out more money to customers, which increases the money supply. This leads to a lower reserve ratio (reserve requirement divided by total deposits) and a higher money multiplier (1/reserve ratio), allowing for more money creation through the fractional reserve banking system.

A Decrease in Reserve Requirements Lowers the Reserve Ratio, Raises