Question

Assume that all commercial banks are loaned up. Total deposits in the banking system are $800 million. The required reserve ratio is decreased. The money supply will decrease. increase. not change because there was no change in deposits. not change because the required reserve ratio has no impact on money supply.

Answer 1

increase

Step-by-step explanation:

Reserve ratio is the percentage of deposits that is required of commercial banks to keep as reserves. The lower the ratio, the higher the increase in money supply

For example, assume reserve ratio is initially 10% of deposits. It is later reduced to 5%. 1000 is deposited

Increase in money supply = deposit / reserve ratio

1000 / 0.1 = 10,000

1000 / 0.05 = 20,000

Money supply increased when reserve ratio was decreased