What best explains why raising the required reserve ratio results in a decease in the money supply?

Answer 1

The reserve ratio is the percentage of deposits that a commercial bank is required to keep on reserve and not lend out. Lowering the reserve ratio increases the money supply in an economy because it permits banks to lend out more money. When the reserve ratio is lowered banks can use the same amount of deposits to create more loans which increases the money supply.

The increase in the money supply following a decrease in the reserve ratio is due to the process of fractional reserve banking. This process allows commercial banks to lend out more money than they have in deposits. For example if the reserve ratio is 10% then a bank can lend out 90% of its total deposits. If the reserve ratio is lowered to 5% the bank can lend out 95% of its deposits. This increased lending expands the money supply in the economy.

The increase in the money supply resulting from a decrease in the reserve ratio has several effects. First it increases the money available for lending which can lead to increased investment and consumption. Second it lowers interest rates which makes borrowing more attractive. Finally it can lead to inflation if the money supply increases faster than economic output. For these reasons central banks must carefully consider the impact of changes to the reserve ratio.

Answer 2

When the required reserve ratio is raised, banks must loan out a smaller portion of their reserves, resulting in fewer loans.

Answer 3

Raising the reserve ratio decreases the money supply because it increases the level of liquidity a bank must maintain. This means the bank cannot loan out nor spend that money; money which is loaned or spent by the bank can achieve a multiplier effect, where money is spent repeatedly between varying actors (velocity of money). Therefore, decreasing the amount of money a bank can give not only decreases the money supply by its strict by but also by the opportunity cost of the multiplier effect which is lost.

Answer 4

When the reserve ratio is reduced, it directly impacts the money supply by allowing banks to extend more credit and create additional funds within the economy. Essentially, the reserve ratio determines the percentage of deposits banks must hold in reserve, with the remaining amount available for lending. When this percentage is decreased, banks have a larger portion of funds to provide as loans. This process results in an increase in the overall money supply, as more money is generated through the credit creation mechanism.

Answer 5

Banking means accepting money from public and then lending to needy public. Thus bank's earn profit by offering higher rate of interest to loanee than depositors.

Government doesn't allow banks to lend 100% of its deposit,it keeps restrictions on its lending capacity. This is to avoid banks getting collapsed in any unforeseen financial crisis.

Therefore RBI fixed amount of bank deposit to be held with RBI as reserve ratio.RBI regulates flow money in public thru increase or reduction in reserve ratio.

A reduction in reserve ratio allows banks to lend more money to public thus unlocking lending potential of banks.Contrary to this, increase reserve ratio reduces lending capacity of banks.

Answer 6

When the required reserve ratio is raised, banks must loan out a smaller portion of their reserves, resulting in fewer loans.

Answer 7

When the required reserve ratio is lowered, banks can loan out more money