Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The bank can lend more money, increasing the money supply.
B
The bank will have to limit lending to maintain balance.
C
The bank's total assets will decrease immediately.
D
The bank will have higher interest rates for loans.
Understanding the Answer
Let's break down why this is correct
Answer
When a bank's required reserves decrease, it means the bank must hold less money in reserve and can use more of its funds for lending. This change allows the bank to lend out more money to customers and businesses, which can stimulate economic activity. For example, if a bank previously had to keep $100,000 in reserves but now only needs to keep $80,000, it can lend out an additional $20,000. This increase in lending can help individuals buy homes or start businesses, leading to more growth in the economy. Overall, a decrease in required reserves generally enhances a bank's ability to lend money.
Detailed Explanation
When required reserves go down, the bank keeps less money on hand. Other options are incorrect because Some might think the bank needs to hold back on lending; It's a common mistake to think that less reserve means less total assets.
Key Concepts
T-Accounts
Bank Reserves
Monetary Policy
Topic
T-Accounts and Bank Reserves
Difficulty
medium level question
Cognitive Level
understand
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