Question

Which statement best describes the outcomes of a decrease in reserve requirements? The reserve ratio increases, the money multiplier decreases, and the money supply decreases. The reserve ratio decreases, the money multiplier decreases, and the money supply decreases. The reserve ratio decreases, the money multiplier increases, and the money supply increases. The reserve ratio increases, the money multiplier increases, and the money supply increases. Question 16 (1 point) Suppose the reserve ratio is 10 percent and banks do not hold excess reserves. Under these circumstances, suppose the Bank of Canada sells $60 million of bonds to the public. Which statement best describes the effects of this open- market operation? Bank reserves decrease by $60 million, and the money supply eventually decreases by $600 million. Bank reserves increase by $60 million, and the money supply eventually increases by $800 million. Bank reserves increase by $60 million, and the money supply eventually increases by $600 million. Bank reserves decrease by $60 million, and the money supply eventually decreases by $800 million.

Answer 1

1 - Option C

Reserve ratio decreases , money multiplier increases and money supply increases

This is because multiplier and reserve ratio are inversely related and multiplier and money supply is directly related.

Reserve ratio will never increase when reserve requirement is decreased. Multiplier will increase and never decrease when reserve requirement is decreased.

2 - Option A

Bank reserves decrease by $ 60 million , money supply will eventually decrease by $ 600 million

Money multiplier = 1/0.10

= 10

Selling the securities decreases the money supply.

Decrease in money supply = 60*10

= $ 600 million