If the central bank reduces the reserve requirements and increased net redemptions (purchases) of Treasury securities, then: A. Banks would decrease acceptance of deposits, and the money supply would decrease. B. Banks would increase lending activities, and the money supply would increase. C. Interest rates would rise, and bank lending activities would decrease.

The correct answer is B.Both of these actions by the central bank increase the money supply. Lowering the reserve requirement will have the effect of banks being able to lend more which would increase money supply and stimulate economic growth. Increasing the net purchases of Treasury securities means more cash is left in circulation, which again increases the money supply.

CFA Level 1 Question Of The Week - Economics (6) - CFA Level 1

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- Matt_AnalystPrep
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  - CFA Charterholder
  25 Apr 2019 at 8:31 am
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  If the central bank reduces the reserve requirements and increased net redemptions (purchases) of Treasury securities, then:
  - A. Banks would decrease acceptance of deposits, and the money supply would
    decrease.
  - B. Banks would increase lending activities, and the money supply would
    increase.
  - C. Interest rates would rise, and bank lending activities would decrease.
- Matt_AnalystPrep
  Participant
  - CFA Charterholder
  29 Apr 2019 at 9:28 pm
  Up
  5
  ::
  The correct answer is B.
  
  Both of these actions by the central bank increase the money supply. Lowering the reserve requirement will have the effect of banks being able to lend more which would increase money supply and stimulate economic growth. Increasing the net purchases of Treasury securities means more cash is left in circulation, which again increases the money supply.
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