Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Higher reserve requirements generally stabilize the economy by limiting the amount of money banks can lend.
B
Lower reserve requirements lead to increased lending, which destabilizes the economy.
C
Reserve requirements have no effect on economic stability.
D
Reserve requirements only affect the interest rates but not economic stability.
Understanding the Answer
Let's break down why this is correct
Answer
Reserve requirements are rules that determine how much money banks must hold in reserve and not lend out. When banks have to keep a higher percentage of their deposits as reserves, they have less money available to lend to people and businesses. This can slow down economic growth because fewer loans mean less spending and investment. For example, if a bank has $1 million in deposits and a reserve requirement of 10%, it must keep $100,000 in reserve, leaving $900,000 available for loans. By adjusting these requirements, central banks can help stabilize the economy; lowering reserve requirements can encourage lending and spending, while raising them can help control inflation.
Detailed Explanation
When banks have to keep more money in reserve, they can lend less. Other options are incorrect because Some think that lending more money is always good; It's a common belief that reserve requirements don't matter.
Key Concepts
economic stability
Topic
Reserve Requirements and Money Creation
Difficulty
easy level question
Cognitive Level
understand
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