PRC-3 · Chapter 19 · Question 5 of 17
The central bank increases the 'cash reserve ratio' (the percentage of deposits banks must keep in the vault and cannot lend out). What is the immediate effect of this policy?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It decreases the ability of commercial banks to create credit, reducing the money supply
Explanation
If banks must hold more cash in reserve, they have less money available to lend out. This restricts the credit multiplier effect and tightens the overall money supply.
More Monetary Policy MCQs
- Q7The Central Bank significantly lowers its benchmark discount rate (the rate it charges commercial banks to borrow money). What is the…
- Q8The Central Bank increases the 'Cash Reserve Ratio', requiring commercial banks to keep 20% of their deposits locked in vaults instead of…
- Q9Which of the following tools is exclusively the domain of Monetary Policy (managed by the Central Bank) rather than Fiscal Policy (managed…
- Q10The country is suffering from out-of-control inflation. The Central Bank initiates a 'contractionary' monetary policy to cool the economy…
- Q11The Central Bank drastically lowers its benchmark discount rate (the rate it charges commercial banks to borrow). What is the intended…