Question

an increase in the required reserve ration decrrases the money multiplier

true ot false

Answer 1

True.
The increasing level of reserve requirements reduces the deposits in the banks and this will reduce the money multiplier. Every bank has to keep certain amount f money as reserves. This will reduce the money stock and raises the cost of credit. The increasing reserve requirement will protect the banks from bank run and the customers from bankruptcy. The adjustment of the reserve ratio will determine the interest rate which fixed by the banks itself. The availability of money to lend by the banks was reduced with respect to the rising reserve rates. Thus the supply of money will come down and the interest rate will increased. The rising interest rate will affect the bond owners and the stock market will behave inversely. The rising reserve ratio will leads to inflation in the economy. The reserve ratio have little impact over the money market and the influence of monetary policy.