Q1-Suppose the Central Bank of Canada increases reserve requirements to ensure b
ID: 1165042 • Letter: Q
Question
Q1-Suppose the Central Bank of Canada increases reserve requirements to ensure banks are well-funded. We expect
[Note: Assume Canada has a fractional reserve banking system like the U.S.]
the money multiplier will rise and the money supply will rise.
the money multiplier will fall and the money supply will fall.
the money multiplier will fall and the money supply will rise.
the money multiplier will rise and the money supply will fall.
a.the money multiplier will rise and the money supply will rise.
b.the money multiplier will fall and the money supply will fall.
c.the money multiplier will fall and the money supply will rise.
d.the money multiplier will rise and the money supply will fall.
Explanation / Answer
With a restrictive policy to increase the reserve requirement the money multiplier will fall and the money supply contracts, raising interest rates and reducing GDP growth as investment and consumption decline due to the higher interest rates. Answer is b.
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