Question

All else equal, if the required reserve ratio falls: a $1 loan can lead to a smaller change in the money supply than before the change in the required reserve ratio. the money multiplier decreases. the money multiplier increases. the amount of excess reserves also falls.

Answer 1

All else equal, if the required reserve ratio falls the money multiplier increases.

Required Reserve Ratio

• The amount of each deposited dollar that a bank is required to hold in reserve with the Fed is known as the necessarily required reserve ratio.
• Banks are permitted to allocate higher percentages of incoming deposits to Excess Reserves rather than Required Reserves if this number falls, which will increase the rate of loan growth.
• Banks lend money to clients based on a portion of the available cash.
• In return for this power, the government imposes one condition on them: they must maintain a specific level of deposits to cover potential withdrawals.
• The reserve requirement is the amount that banks must reserve and above which they are not permitted to provide loans.

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