Question

Other things the same, if reserve requirements are increased, the reserve ratio a. increases, the money multiplier increases, and the money supply increases. b. increases, the money multiplier decreases, and the money supply decreases. c. decreases, the money multiplier increases, and the money supply increases. d. decreases, the money multiplier decreases, and the money supply increases.

Answer 1

Answer: b. increases, the money multiplier decreases, and the money supply decreases

Explanation:

When the central bank raises the reserve requirement, the reserve ratio increase as banks will now hold more money as reserves. The Money multiplier decreases as Reserve ratio increase therefore when The reserve ratio increases the money multiplier will decrease which will then lead to a decrease in the money supply.

When Banks hold more money because of an increased reserve requirement, Money Multiplier and Money supply will decrease because each bank will have less funds available for loans.