Suppose The Fed lowers the reserve ratio requirement for banks to increase the money supply in an economy.  Which of the following best describes why this may not have the desired effect on M1 and M2? A) The monetary base can at times be rigid to Fed policy. B) Pessimistic banks may hold onto reserves even though the required reserve amount is lower. C) Optimistic banks may lend out more reserves than anticipated. D) There might not be a strong market for loanable funds.

Question

Suppose The Fed lowers the reserve ratio requirement for banks to increase the money supply in an economy.  Which of the following best describes why this may not have the desired effect on M1 and M2?

A) The monetary base can at times be rigid to Fed policy.

B) Pessimistic banks may hold onto reserves even though the required reserve amount is lower.

C) Optimistic banks may lend out more reserves than anticipated.

D) There might not be a strong market for loanable funds.

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