Question

Central bank policy requires all banks to hold 10% of deposits as reserves. Pacific Bank policy prevents it from holding excess reserves. Suppose banks cannot trade any of the bonds they already have. If the central bank decides to lower the reserve requirement to 9%, which of the following will result?

A. the money supply in the economy decreases
B. decrease of $1 million in Pacific's net worth
C. increase of $1 million in Pacific's loan assets
D. increase of Pacific's bond assets by $1million

Answer 1

C. increase of $1 million in Pacific's loan assets

Step-by-step explanation:

If Pacific Bank does not hold excess reserves, then a decrease in the reserve requirement from 10% to 9% will render more money with the bank to lend.

Therefore, This will increase Pacific's ability to make loans.