If the Bank of Canada reduced reserve requirements, ______.
A) banks would have less money to lend businesses and consumers
B) interest rates would fall
C) inflation would decline
D) economic growth would decline

Question

Quizplus · Accepted Answer

Reducing reserve requirements means banks are required to hold less money in reserve and can therefore lend out more money. This increases the supply of loanable funds and puts downward pressure on interest rates. Therefore, choice B is the correct answer. Option A is incorrect because reducing reserve requirements actually allows banks to lend more money, not less. Option C is incorrect because reducing reserve requirements is likely to increase inflation, given that it results in a greater supply of money in circulation. Option D is incorrect because reducing reserve requirements stimulates economic growth by increasing the availability of loanable funds.

If the Bank of Canada Reduced Reserve Requirements, ______