Question

In a system of fractional reserve banking, if central bank reduces its lending to the bank, it

Select one:

a. increases monetary base

b. decreases monetary base

c. increases money supply

d. decreases money supply

Answer 1

In a system of fractional reserve banking, if central bank reduces its lending to the bank, it decreases money supply

Explanation

Monetary base includes money in circulation plus the money held by the commercial banks as reserves.Money supply includes money in circulation plus deposits at bank as deposits. In fractional reserve banking, the commercial banks are asked to hold a part of the amount deposited at hand for withdrawal and not lend it. Thus, if the central bank reduces the lending to the commercial bank, the money in circulation will reduce, which is money supply will reduce