Your friend explained that a lower reserve requirement ratio reduces the money supply. Do
you agree? Justify your answer

Question

Your friend explained that a lower reserve requirement ratio reduces the money supply. Do
you agree? Justify your answer

Accepted Answer

∻Solution∻ ‖ a ⋮ Reserve Requirement Ratio: The reserve requirement ratio is the fraction of deposits that a bank must hold in reserve and not lend out. ‖ ‖ b ⋮ Money Supply Impact: A lower reserve requirement ratio means banks can lend out a larger portion of their deposits, increasing the money supply. ‖ ‖ c ⋮ Money Multiplier Effect: The money multiplier, defined as $ \frac{1}{ ext{Reserve Requirement Ratio}} $, increases when the reserve requirement ratio decreases, leading to a larger expansion of the money supply. ‖ ∻Answer∻ ⚹ No, I do not agree. A lower reserve requirement ratio actually increases the money supply. ⚹ ∻Key Concept∻ ⚹ Reserve Requirement Ratio ⚹ ∻Explanation∻ ⚹ The reserve requirement ratio determines the amount of funds that banks must hold in reserve. A lower ratio allows banks to lend more, thereby increasing the money supply through the money multiplier effect. ⚹◊How does a decrease in the reserve requirement ratio impact the money supply in an⍭ Generate me a similar question◊

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