The Central Bank of Guyana increased the reserve requirement for commercial banks from 10% to 12%. What is the MOST likely effect of this action?

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Question

The Central Bank of Guyana increased the reserve requirement for commercial banks from 10% to 12%. What is the MOST likely effect of this action?

Accepted Answer

The money supply will contract — Award 1 mark for understanding that higher reserve requirements reduce banks' lending capacity, thereby reducing money supply. A is incorrect — banks will have less money available to lend. B is incorrect — interest rates typically rise when money supply contracts. D is incorrect — reserve requirements do not directly affect government revenue.

Answer

Banks will have more money to lend

Answer

Government revenue will increase

Answer

The money supply will contract

Answer

Interest rates will decrease

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