Question

Currently, commercial banks have a 5% reserve/deposit ratio. The Federal Reserve decreases the reserve ratio to 3%. This means banks could _____ loans and deposits. It also means the money supply could _____.

 

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease

 

Answer 1

A.

This means that banks could increase loans and deposits. It also means the money supply could increase.

This is because decrease in reserve ratio lowers the amount of cash that banks are required to hold in reserves.