Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The bank will be able to lend more money due to increased reserves.
B
The bank will have less money available for loans.
C
The bank will lower interest rates to attract more deposits.
D
The bank will increase its investment in securities.
Understanding the Answer
Let's break down why this is correct
Answer
When a commercial bank increases its reserve requirements, it means that the bank has to keep a larger portion of its deposits in reserve and cannot use that money for lending. This leads to a decrease in the amount of money available for loans, which means the bank can lend less to customers and businesses. For example, if a bank typically keeps 10% of deposits in reserve and raises it to 15%, it will have less money to lend out. As a result, fewer loans are given, which can slow down economic activity since businesses and individuals may struggle to get the funds they need. Overall, higher reserve requirements limit a bank's ability to provide loans, impacting its customers and the economy.
Detailed Explanation
When a bank has to keep more money in reserve, it has less money to lend out. Other options are incorrect because Some might think that having more reserves means more money to lend; It's a common idea that lowering interest rates will attract more deposits.
Key Concepts
Commercial Banks
Reserve Requirements
Monetary Policy
Topic
Commercial Banks and Reserve Requirements
Difficulty
easy level question
Cognitive Level
understand
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