If the reserve-deposit ratio falls,then
A) the ability of commercial banks to create money is greater.
B) the ability of commercial banks to create money is lower.
C) the money multiplier is smaller.
D) the level of required reserves is greater.
E) the ability of commercial banks to create money is unaffected.

Question

Quizplus · Accepted Answer

When the reserve-deposit ratio falls, the required reserves decrease, making more funds available to lend. This increases the ability of commercial banks to create money through the credit creation process, resulting in more loans and a larger money supply. Therefore, the best choice is A, which states that the ability of commercial banks to create money is greater.

If the Reserve-Deposit Ratio Falls,then