If a bank's required reserve ratio increases, the immediate effect is generally to:
Correct answer: B. Reduce the funds available for lending
- A. Increase the funds available for lending
- B. Reduce the funds available for lending
- C. Eliminate the bank's deposit liabilities
- D. Guarantee a rise in bank profits
Explanation
A higher reserve requirement obliges banks to keep a larger share of deposits as reserves, leaving less available for loans and investments. It does not remove deposit liabilities or guarantee any particular profit outcome.
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About Finance and Banking Basics
Business finance covers capital requirements, sources of funds, budgeting, cash flow, investment decisions and basic financial statements and ratios. Banking includes commercial bank functions, deposits, loans, credit creation, interest and the role of a central bank, including its monetary policy and regulatory functions.
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