BANKING GENERAL KNOWLEDGE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the money supply will expand.
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there is more money available to lend.
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there is less money available to lend.
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both a and b, but not c.
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Detailed explanation-1: -If banks have a higher reserve requirement, there will be less money available to lend to consumers and businesses. However, this money will then provide the banks with a level of protection against possible bank failure should there be an economic downturn or a run on the bank.
Detailed explanation-2: -If banks decide to hold more excess reserves and make fewer loans, the amount of money supply will be smaller.
Detailed explanation-3: -Key Takeaways However, banks actually rely on a fractional reserve banking system whereby banks can lend more than the number of actual deposits on hand. This leads to a money multiplier effect. If, for example, the amount of reserves held by a bank is 10%, then loans can multiply money by up to 10x.
Detailed explanation-4: -If the Federal Reserve decides to lower the reserve ratio through an expansionary monetary policy, commercial banks are required to keep less cash on hand and are able to increase the number of loans to give consumers and businesses. This increases the money supply, economic growth and the rate of inflation.