Banca Solida has always kept a reserve ratio of 25 percent. It is taken over by Gung-Ho Bank, which keeps a reserve ratio of 12.5 percent. If Banca Solida adopts its new owner’s practices, what happens to the money supply in its country?
Correct answer D. Money supply will increase because Banca Solida will increase its loans
Explanation
Halving the reserve ratio frees reserves that Banca Solida can lend, and new loans create new deposits, so the money supply rises even without central bank action.
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