Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A higher reserve requirement decreases the amount of money a bank can lend.
B
Lowering the reserve requirement allows banks to lend more, increasing the money supply.
C
Increasing reserve requirements has no effect on the bank's ability to create loans.
D
A reserve requirement of 20% means that the bank can lend 80% of its deposits.
E
Reserve requirements directly influence nominal interest rates.
Understanding the Answer
Let's break down why this is correct
Answer
Reserve requirements are rules that determine how much money a bank must keep on hand and not lend out. When reserve requirements are low, banks can lend more money, which helps create more money in the economy. For example, if a bank has $100 in deposits and the reserve requirement is 10%, it must keep $10 but can lend out $90. This lending increases the total money supply because the money lent can be deposited in other banks, allowing them to lend even more. Therefore, lower reserve requirements lead to greater money creation, while higher reserve requirements restrict a bank's ability to create money.
Detailed Explanation
Other options are incorrect because Some might think that a higher reserve means less money to lend; People may believe that lowering reserves always means more loans.
Key Concepts
Reserve Requirements
Money Creation
Banking System
Topic
Reserve Requirements and Money Creation
Difficulty
medium level question
Cognitive Level
understand
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