Question

ccording to the fractional reserve theory of banking (money multiplier model), if the central bank simultaneously reduces both the discount rate and the statutory required reserve ratio applied to commercial banks, then the money supply will

Answer 1

INCREASE

Step-by-step explanation:

Reducing discount rate and required reserve ratio are examples of expansionary monetary policies

Expansionary monetary policy : these are polices taken in order to increase money supply. When money supply increases, aggregate demand increases. reducing interest rate and open market purchase are ways of carrying out expansionary monetary policy

When the required reserve is reduced, the amount of loans that a bank can give increases and this increases money supply.

If discount rate is reduced, it becomes cheaper for commercial banks to borrow money. this increases money supply