Reducing reserve requirements is intended to:

Reducing reserve requirements is intended to:

• A. Decrease the money supply.
• B. Increase the money supply.
• C. Cause immediate inflation.
• D. Have no impact.

Answer: (B)

This question tests how reserve requirements affect the money supply. Reserve requirements tell banks what fraction of deposits they must hold as reserves. When the requirement is reduced, banks have more funds available to lend. As banks issue new loans, those loans become new deposits, and the money circulating in the economy increases because deposits expand beyond the original reserves. This is the core idea behind the money multiplier: lower reserve requirements raise the potential for creating money through lending, so the intended outcome is to increase the money supply. It doesn’t guarantee immediate inflation or imply no impact—the change mainly shifts the supply of money upward by enabling more lending and spending over time.

This question tests how reserve requirements affect the money supply. Reserve requirements tell banks what fraction of deposits they must hold as reserves. When the requirement is reduced, banks have more funds available to lend. As banks issue new loans, those loans become new deposits, and the money circulating in the economy increases because deposits expand beyond the original reserves. This is the core idea behind the money multiplier: lower reserve requirements raise the potential for creating money through lending, so the intended outcome is to increase the money supply. It doesn’t guarantee immediate inflation or imply no impact—the change mainly shifts the supply of money upward by enabling more lending and spending over time.