When the central bank lowers the reserve requirement on deposits, which of the following is most likely to occur?

• A. The demand for money decreases significantly.
• B. Banks can lend out a greater proportion of their deposits, increasing the money supply.
• C. The interest rate on loans automatically increases.
• D. Banks must hold more reserves, reducing their ability to make loans.

Answer: (B)

Verified step by step guidance

1. Understand the role of the reserve requirement: It is the fraction of deposits that banks are required to keep as reserves and not lend out.
2. When the central bank lowers the reserve requirement, banks are allowed to hold a smaller fraction of deposits as reserves.
3. This means banks can lend out a greater proportion of their deposits, increasing the amount of money circulating in the economy.
4. An increase in lending typically leads to an increase in the money supply, as more loans create more deposit money.
5. Therefore, the most likely outcome is that banks can lend out more, which increases the money supply, rather than the demand for money decreasing or interest rates automatically increasing.