Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The bank can lend more money, leading to increased money supply.
B
The bank must hold more cash in reserves than required.
C
The bank's profits decrease significantly.
D
The bank cannot use excess reserves for lending.
Understanding the Answer
Let's break down why this is correct
Answer
When a central bank lowers reserve requirements, it means that banks need to keep less money in reserve and can lend out more. This leads to what we call excess reserves, which is the extra money banks have after meeting the required reserves. With more money available to lend, banks can give out more loans to businesses and individuals, which can stimulate economic growth. For example, if a bank has $1 million in deposits and the reserve requirement is lowered to 5%, the bank can now lend out $950,000 instead of $800,000. This increase in lending can lead to more spending in the economy, helping to create jobs and boost overall economic activity.
Detailed Explanation
When a bank has extra money that it doesn't need to keep, it can lend that money. Other options are incorrect because Some might think the bank has to keep more cash than it needs; It's a common belief that lending more money means less profit.
Key Concepts
excess reserves
Topic
Reserve Requirements and Money Creation
Difficulty
easy level question
Cognitive Level
understand
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