If the central bank decreases the amount of reserves banks...

If the central bank decreases the amount of reserves banks are required to hold from 20% to 10%, then: a) both the money multiplier and the supply of money in the economy will decrease. b) both the money multiplier and the supply of money in the economy will increase. c) the money multiplier will decrease and the supply of money in the economy will increase. d) the money multiplier will increase and the supply of money in the economy will decrease.

Transcript

00:01 So let's walk through the process of money creation before we get into the answer.

00:07 So we start off with the central bank creates what's called monetary base or what base money.

00:18 The central bank then injects this money into private banks, right? sometimes you might call that an open market operation.

00:28 There are two things that happen.

00:29 One is the private banks keep some reserves.

00:36 And then two, they make loans, right? and make loans increases the amount of money.

00:51 Because when, and you know, this question is maybe a bit too, i don't want to get carried away here, but remember the basic idea of when a bank makes a loan, it is extending credit to someone.

01:04 It is then that money gets redeposited or kept within the banking system right like if a bank makes a loan to a construction company for a hundred million dollars the construction company doesn't show up and withdraw a hundred million dollars in cash right the bank keeps most of that money and only uses it when the construction company spends it on something so when the bank makes a loan most of the money stays in the bank right so it says the construction company you have a hundred million dollars but the bank still has a lot of that in the bank.

01:35 And so the bank can keep making loans, right? this is, you may have heard the term fractional reserve banking.

01:41 This is what's going on here.

01:43 This is why money is being created...

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