Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The bank can lend more money than before.
B
The bank must reduce its lending activities.
C
The bank will have no change in its lending capacity.
D
The bank will increase its reserve ratios.
Understanding the Answer
Let's break down why this is correct
Answer
When a bank's required reserves decrease, it means the bank is allowed to keep less money in reserve and can use more of its deposits for lending. This change typically happens when the central bank lowers reserve requirements, which encourages banks to lend more money. Since the total deposits remain constant, the bank now has extra funds that it can lend out to customers or businesses, which can help stimulate the economy. For example, if a bank has $1 million in deposits and the reserve requirement drops from 10% to 5%, it can lend out an additional $50,000. As a result, the bank's ability to lend increases, allowing it to support more loans and investments.
Detailed Explanation
When required reserves go down, the bank keeps less money on hand. Other options are incorrect because Some might think that lower reserves mean less lending; This option suggests nothing changes.
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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