Holding everything else constant, if the required reserve ratio falls:

Question

Quizplus · Accepted Answer

When the required reserve ratio falls, banks can hold less in reserves and lend out more money. This results in an increase in the money multiplier, which is the ratio of the change in the money supply to the change in the monetary base. Therefore, choice A is the best answer. Choice B is incorrect because a lower required reserve ratio means that banks can create more money from a given amount of reserves, so a $1 loan can still lead to a larger change in the money supply. Choice C is also incorrect because a lower required reserve ratio means that banks will have more excess reserves. Choice D is also incorrect because the money multiplier is increasing, not decreasing.

Holding Everything Else Constant, If the Required Reserve Ratio Falls