PRC-3 · Chapter 19 · Question 8 of 17
The Central Bank increases the 'Cash Reserve Ratio', requiring commercial banks to keep 20% of their deposits locked in vaults instead of 10%. How does this affect the economy's money supply?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It decreases the money supply by restricting commercial banks' ability to create credit
Explanation
By forcing banks to hold a higher percentage of deposits in reserve, the central bank directly reduces the amount of money banks can lend out, shrinking the credit multiplier and the money supply.
More Monetary Policy MCQs
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- Q11The Central Bank drastically lowers its benchmark discount rate (the rate it charges commercial banks to borrow). What is the intended…
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