Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It decreases the money supply, leading to higher interest rates and reduced lending.
B
It increases the bank's profits, allowing for more loans.
C
It has no impact on lending since banks can lend from their profits.
D
It encourages banks to lend more to maintain their reserve ratios.
Understanding the Answer
Let's break down why this is correct
Answer
When a central bank increases reserve requirements, it means that commercial banks must hold more money in reserve and cannot use it to lend out. This reduces the amount of money available for loans, making it harder for people and businesses to borrow money. For example, if a bank normally has to keep 10% of its deposits in reserve, increasing this to 15% means the bank has less money to lend. As a result, fewer loans can lead to less spending and investment in the economy, which can slow down economic growth. Overall, higher reserve requirements can make borrowing more difficult, affecting both individuals and the economy as a whole.
Detailed Explanation
When banks have to keep more money in reserve, they have less to lend out. Other options are incorrect because Some might think that keeping more reserves means banks make more money; It's a common belief that banks can always lend from their profits.
Key Concepts
Reserve Requirements
Money Supply
Interest Rates
Topic
Commercial Banks and Reserve Requirements
Difficulty
medium level question
Cognitive Level
understand
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