PRC-3 · Chapter 19 · Question 12 of 17
The Central Bank raises the 'Cash Reserve Ratio', legally requiring commercial banks to lock 20% of their deposits in vaults instead of 10%. How does this affect the money supply?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It decreases the money supply by restricting banks' ability to create credit
Explanation
By forcing banks to hold a higher percentage of cash in reserve, they have less money available to lend out, shrinking the credit multiplier and tightening the money supply.
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