Lowering the reserve requirement results in what?

• A. Higher reserve requirement
• B. Fewer loans
• C. More money to loan
• D. Lower interest rates

Answer: (C)

Lowering the reserve requirement means banks must hold a smaller portion of deposits as reserves. This frees up funds that were previously set aside, so banks can issue more loans to households and businesses. With more money available to loan, the banking system can extend additional credit, increasing the money circulating in the economy through the lending multiplier. While lower reserve requirements can put downward pressure on interest rates due to more funds being available, the direct effect requested is that there is more money to loan.