Question

Why is lowering the interest rate on reserves considered an expansionary monetary policy? A. It encourages banks to lend money instead of keeping it in reserve.
B. It pressures investors to spend more money on treasury securities.
C. It prevents investors from withdrawing too much money from banks.
D. It causes banks to increase their prime interest rate in response.​

Answer 1

Step-by-step explanation:

The reserve ratio is the central bank's mandate for banks to keep a certain reserve requirements, which are excess cash deposits that must be kept on hand and not loaned out.

Raising the ratio is contractionary since less loans can be made, but this also solidifies banks' balance sheets.

If the Federal Reserve instead lowers the reserve ratio through an expansionary monetary policy, commercial banks are required to hold less cash on hand and can make more loans.