ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When the reserve requirement ratio is raised, the money multiplier decreases, and the amount of excess reserves decreases in the banking system . Explanation: The money held by the bank that cannot be lent is the reserves to be kept as per the reserve requirement ratio prescribed by the central bank.

Detailed explanation-2: -A reduction in the required reserve ratio from 20% to 10% is an expansionary monetary policy because it implies that the banks are required to keep a lower proportion of the total deposits in the form of reserves, freeing up money to be given out as loans for credit creation.

Detailed explanation-3: -If the central bank decreases the amount of reserves banks are required to hold from 20% to 10%, then: both the money multiplier and the supply of money in the economy will increase.

Detailed explanation-4: -Answer and Explanation: The money multiplier is 1/0.15=6.6667. The total effect of a $40 billion increase in reserves on checkable deposits is the size of the increase multiplied by the money multiplier which is $40*6.6667=$267 billion.