Which statement best describes the outcomes of a decrease in the reserve requirement in a fractional reserve system?
A) Both the money multiplier and the money supply increase.
B) Both the money multiplier and the money supply decrease.
C) The money multiplier increases, but the money supply decreases.
D) The money multiplier decreases, but the money supply increases.

Question

Quizplus · Accepted Answer

When the reserve requirement is decreased in a fractional reserve system, banks are required to hold less reserves and can lend out more money. This leads to an increase in the money multiplier, which is the ratio of the amount of money created by the banking system to the amount of reserves held by the banks. As the money multiplier increases, the money supply also increases, since banks are able to create and lend out more money. Therefore, both the money multiplier and the money supply increase when the reserve requirement is decreased.

Which Statement Best Describes the Outcomes of a Decrease in the Reserve