Ceteris paribus,if the Fed reduces the reserve requirement,then:
A) Total reserves increase.
B) Total deposits decrease.
C) The lending capacity of the banking system increases.
D) The money multiplier decreases.

Question

Quizplus · Accepted Answer

Reducing the reserve requirement means banks are required to hold less money in reserves against their deposits. This means they have more money to lend out, increasing the lending capacity of the banking system. Total reserves may or may not increase depending on whether banks choose to hold more or less than the lower reserve requirement. Total deposits may also decrease if banks choose to reduce the amount of deposits they hold since they now have more money to lend out. The money multiplier increases, not decreases, with a lower reserve requirement since each dollar held in reserves can support more loans and hence more deposits.

Ceteris Paribus,if the Fed Reduces the Reserve Requirement,then