If the central bank lowered the reserve requirement, what happens to the money multiplier and the money supply?
A) The money multiplier increases, but the money supply decreases.
B) The money multiplier decreases, but the money supply increases.
C) The money multiplier and the money supply both increase.
D) The money multiplier and the money supply both decrease.

Question

Quizplus · Accepted Answer

Lowering the reserve requirement allows banks to hold less money in reserves and lend out more money. This increases the money multiplier, as banks can create more loans and deposits for every dollar held in reserves. As a result, the money supply will ultimately increase, as there is more money in circulation.

If the Central Bank Lowered the Reserve Requirement, What Happens