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3.3.2 Quiz: The Effects of Monetary Policy

Question 4 of 10

What happens when a country's central bank increases reserve requirements for banks?

A. Banks are required to sell all of their treasury securities on the open market.

B. Banks must pay a higher interest rate to borrow money from the government.

C. Banks are forced to set aside more of their money instead of lending it.

D. Banks must pay the government interest on all cash they keep on hand.

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Answer :

GinnyAnswer

Final answer:

When the central bank increases reserve requirements for banks, it forces banks to set aside more money, reducing the money supply and potentially having a contractionary effect on the economy.


Explanation:

When a country's central bank increases reserve requirements for banks, banks are forced to set aside more of their money instead of lending it out. This decrease in the amount of money available for lending can lead to a reduction in the money supply within the economy. As a result, this policy move can have a contractionary effect on the economy by limiting the amount of credit available to borrowers.


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