Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It increases the amount of money banks can lend out.
B
It decreases the interest rates on loans.
C
It reduces the total reserves banks must hold, allowing for more lending.
D
It has no effect on the money supply.
Understanding the Answer
Let's break down why this is correct
Answer
When a central bank changes reserve requirements, it directly impacts how much money commercial banks can lend. Reserve requirements are the percentage of deposits that banks must keep on hand and not lend out. If the central bank lowers these requirements, banks have more money available to lend, which can help stimulate the economy by encouraging more borrowing and spending. For example, if a bank has $1 million in deposits and the reserve requirement is lowered from 10% to 5%, it can now lend out $500,000 instead of $900,000. This increase in lending can lead to more investments and consumer purchases, boosting economic growth.
Detailed Explanation
When the central bank lowers reserve requirements, banks can keep less money in reserve. Other options are incorrect because Some might think that just changing reserve requirements directly increases lending; It's a common belief that lower reserve requirements automatically lower loan interest rates.
Key Concepts
Commercial banks
Reserve requirements
Monetary policy
Topic
Commercial Banks and Reserve Requirements
Difficulty
hard level question
Cognitive Level
understand
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