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Which of the statements below is an accurate description of the economy's reaction to changes in the reserve requirements (interest rates)?(1 point)

Responses

If the reserve requirements tightened, less funds are in reserves and banks do not have as much funds to lend, leading to a decrease in interest rates for customers and an increase in economic growth.
If the reserve requirements tightened, less funds are in reserves and banks do not have as much funds to lend, leading to a decrease in interest rates for customers and an increase in economic growth.

If the reserve requirements tightened, more funds are in reserves and banks do not have as much to lend, leading to an increase in interest rates for customers and a decrease in economic growth.
If the reserve requirements tightened, more funds are in reserves and banks do not have as much to lend, leading to an increase in interest rates for customers and a decrease in economic growth.

If the reserve requirements loosened, less funds are in reserves and banks would have more to lend, leading to an increase in interest rates and an increase in economic growth.
If the reserve requirements loosened, less funds are in reserves and banks would have more to lend, leading to an increase in interest rates and an increase in economic growth.

If the reserve requirements loosened, more funds are in reserves and banks do not have as much to lend, leading to an increase in interest rates and a decrease in economic growth.

1 answer

The accurate statement regarding the economy's reaction to changes in reserve requirements is:

If the reserve requirements tightened, more funds are in reserves and banks do not have as much to lend, leading to an increase in interest rates for customers and a decrease in economic growth.

To clarify:

  • When reserve requirements are tightened, banks are required to hold a larger percentage of their deposits in reserve and have less to lend out. This reduction in available loanable funds can lead to higher interest rates, as banks typically charge more for loans when they have less to lend.
  • Higher interest rates generally discourage borrowing, which can lead to a decrease in economic growth.

Therefore, the correct response reflects the negative impact on lending and economic activity due to tighter reserve requirements.