Answer the indicated question on the basis of the information in Table 14.2.Each question is based on the original balance sheet.

-In Table 14.2,if the Fed changes the required reserve ratio to 25 percent,the lending capacity of the banking system will eventually:
A) Rise by $160 billion.
B) Fall by $160 billion.
C) Rise by $40 billion.
D) Fall by $40 billion.

Question

Answer the indicated question on the basis of the information in Table 14.2.Each question is based on the original balance sheet.
 
-In Table 14.2,if the Fed changes the required reserve ratio to 25 percent,the lending capacity of the banking system will eventually:
A) Rise by $160 billion. 
B) Fall by $160 billion. 
C) Rise by $40 billion. 
D) Fall by $40 billion.

Quizplus · Accepted Answer

When the Fed increases the required reserve ratio, banks must hold a larger fraction of deposits as reserves, reducing the amount they can lend out. This decrease in lending capacity reduces the money multiplier effect. If the required reserve ratio is increased to 25%, banks can lend out less money than before, leading to a contraction in the lending capacity of the banking system. Without the specific numbers from Table 14.2, the exact calculation can't be shown, but the principle is that increasing reserve requirements reduces lending capacity.

Answer the Indicated Question on the Basis of the Information