The ability to create money will ---------- as banks lend out --------- money. a. increase, more...

The ability to create money will ---------- as banks lend out --------- money.

a. increase, more

b. increase, less

c. decrease, more

d decrease, less

Expert Solution

Answer - increase, more

Reason -

The ability to create money will increase as banks lend out more money.

The creation of money by bank is dependent on the money Multiplier effect and reserve requirement. When the banks have lower reserve requirement they are able to lend more money and the Multiplier increases leading to a higher money supply.

The money which is lend by a bank comes in form of deposit in another bank and the same is lend by the bank again keeping a fractional reserve and the chain continues till the very last penny is circulated.

Reserve is an important factor on which the ability to lend money is dependent. It is the amount of money which the banks need to keep out of the money they lend. This requirement is fixed by the federal bank to regulate money supply in an economy.

In simple terms the higher the reserve requirement the lower lending capacity for banks and less creation of money and the lower the reserve requirement the higher lending capacity for banks leading to create more money.

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