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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.
- A. Banks would decrease acceptance of deposits, and the money supply would
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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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