An increase in the required reserve ratio, everything else held constant, will:

Question

BlackTom AI · Accepted Answer

The money multiplier is 1 divided by the required reserve ratio, so an increase in the required reserve ratio lowers the multiplier and thus reduces the money supply (for a given monetary base).

1. Relevant knowledge points and concepts
- Required reserve ratio (r): fraction of deposits banks must hold as reserves.
- Money multiplier (m): m = 1/r (simple deposit multiplier assuming no currency holding and all reserves are required).
- Money supply (M) in this framework: M = m × monetary base (B). Holding the monetary base constant, a change in r changes m and therefore M.

2. Complete reasoning process step by step
- Start with m = 1/r. If r increases, the denominator increases → m decreases.
- With B fixed (everything else held constant), M = m × B. A smaller m yields a smaller M.
- Banks, facing a higher r, must keep a larger fraction of deposits as reserves and therefore create fewer loans; fewer loans means less deposit expansion and a smaller overall money supply.

3. Calculations with intermediate steps (numerical example)
- Suppose initial r = 0.10 → m_initial = 1/0.10 = 10. With B = $1,000, M_initial = 10 × $1,000 = $10,000.
- Increase r to 0.20 → m_new = 1/0.20 = 5. Then M_new = 5 × $1,000 = $5,000.
- Money supply falls from $10,000 to $5,000, illustrating the decrease.

4. Why the correct answer is correct
- Because the multiplier falls when the required reserve ratio rises, the total amount of deposit creation and hence the money supply falls (given a fixed monetary base).

5. Why the other options are incorrect
- a. increase the money supply: wrong because a higher r reduces the multiplier and therefore reduces, not increases, M.
- c. increase bank reserves: misleading. Required reserves per deposit do rise, but the question’s focus is on the overall money supply; banks will hold more reserves relative to deposits but create fewer loans, and the net macro effect is a smaller money supply. Thus this option is not the best answer.
- d. not affect the money supply: incorrect because the multiplier and deposit creation change when r changes.

6. Conclusion
- Therefore, an increase in the required reserve ratio, everything else held constant, will decrease the money supply. This matches answer b.

An increase in the required reserve ratio, everything else held constant, will:Single choice

Similar Questions

Contractionary monetary policy in an open economy with a floating exchange rate will likely ____ a trade surplus.

Which is contractionary monetary policy?

Which of the following tools affects the monetary base most directly?

The Fed can provide additional reserves to the banking system by either government bonds or discount loans.

If the government finances its spending by selling bonds to the central bank, the monetary base will and the money supply will .

Suppose the Bank of Japan buys U.S. dollar assets using yen; this causes:

If the federal funds rate is between the discount rate and interest on excess reserves, a decline in the reserve requirement:

If the federal funds rate is between the discount rate and interest on excess reserves, an increase in the reserve requirement:

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler