Question

What happens when a bank is required to hold more money in reserve?

Answer 1

Answer:

The correct answers are (A) and (C)

Explanation:

When a commercial bank is required to hold more money in reserve, this is usually a government or central bank policy (contractionary monetary policy) to reduce the amount of money in circulation.

The bank will then have less money to loan out and also less money to pay interest on loans. This gives the answers (A) and (C).

As for (B) and (D), cash-reserve ratio does not affect the basic flow of money in bank operations and a bank can't have less money for its customers to withdraw just because they are required to hold more money in their reserve. Every saver or customer remains entitled to all the money he saves in the bank.