South Korea: Bank reserves raised
To rein in spending, the Bank of Korea raised the required reserve ratio to 7 percent from 5 percent—the first raise in almost 17 years. With higher required reserves, banks will have to cut the amount of loans they make.
Source: The New York Times, November 24, 2006
Explain why the higher required reserve ratio means that banks will have to cut the amount of loans they can make.
The higher required reserve ratio means that banks will have to cut the amount of loans they can make because __________.
A. they decrease the amount of currency they hold and increase their deposits at the central bank, so they have less money to loan out to customers
B. they have fewer excess reserves with which to make loans
C. the discount rate rises
D. they are forced to raise interest rates and customers are less likely to borrow money at higher interest rates
E. they make more open market purchases and have less money to loan out to customers
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