Bance Solida has, in the past, always operated with a reserve ratio of 25 percent. It has now been taken over by Gung-Ho Bank Which operates with a reserve ration of 12½ percent, Assuming that Banca Solida adopts the business practices of its new owner, What will be the effect on money supply in the country in which Banca Solida operates ?

A. Money supply will increase because Banca Solida will increase its loans
B. The effect on money supply cannot be determined from the information given
C. Money supply will decrease because the loans will have to be repaid
D. Money supply will be unchanged because the central bank has made no policy changes

Correct Answer: Money supply will increase because Banca Solida will increase its loans ✔

Last Updated: June 18, 2019