If banks are fully loaned up, have no excess reserves, and the required reserve ratio is raised, the amount that banks can lend is:
A) reduced and the money supply contracts.
B) reduced and the money supply expands.
C) reduced and there is no change in the money supply.
D) increased and the money supply expands.
E) increased and the money supply contracts.

Question

Quizplus · Accepted Answer

If banks are fully loaned up and have no excess reserves, then increasing the required reserve ratio will reduce the amount that banks can lend. This, in turn, will lead to a contraction in the money supply as there will be less money circulating in the economy.

If Banks Are Fully Loaned Up, Have No Excess Reserves