PRC-3 · Chapter 19 · Question 16 of 17
When the Central Bank drastically increases the required 'Cash Reserve Ratio' for commercial banks, what is the direct effect on the economy?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It decreases the money supply by restricting banks' ability to create credit
Explanation
A higher reserve ratio forces commercial banks to lock more cash in vaults, leaving less money to lend out, which shrinks the credit multiplier and money supply.
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