If the Bank of Canada decreases the reserve requirement from 10% to 5%,the money multiplier will _____ and the money supply will most likely _____.

Question

Quizplus · Accepted Answer

When the reserve requirement decreases, banks need to hold a lower portion of their deposits as reserves and can lend out more money. This leads to an increase in the money multiplier, which is the reciprocal of the reserve requirement. In this case, the money multiplier would increase from 10 to 20 (= 1/0.05), indicating a greater expansion of the money supply. Therefore, the most likely outcome is an increase in the money supply.

If the Bank of Canada Decreases the Reserve Requirement from 10