Question

which one is correct

Which of the following occurs when the European Central Bank reducesreserve requirements?

a The money multiplier gets bigger.

b The amount of money in the economy is reduced.

c Banks become more reluctant to lend.

d Interest rates tend to rise in the economy.

Answer 1

Answer : The answer is option a.

Money multiplier = 1 / Requires reserve ratio

Now if required reserve decrease then the value of money multiplier increase.

For example let required reserve ratio is 10% or 0.1. So, money multiplier = 1 / 0.1 = 10.

Now if required reserve ratio is 5% or 0.05 then money multiplier = 1 / 0.05 = 20.

Now we can see that here when required reserve decreases then money multiplier increases.

Hence except option a other options are not correct. Therefore, option a is the correct answer.