What is a likely direct result in bank behavior after the Federal Reserve lowers the required reserve rate?

• A. Banks will hold more reserves than before.
• B. Banks will increase the amount of loans they make to customers.
• C. Banks will decrease the amount of loans they make to customers.
• D. Banks will stop accepting new deposits.

Answer: (B)

Verified step by step guidance

1. Understand the concept of the required reserve ratio: it is the fraction of deposits that banks are mandated by the Federal Reserve to keep as reserves and not lend out.
2. When the Federal Reserve lowers the required reserve ratio, banks are required to hold a smaller percentage of their deposits as reserves.
3. With a lower reserve requirement, banks have more excess reserves available beyond the mandatory minimum.
4. Banks can use these excess reserves to increase lending to customers, as they are no longer restricted to hold as much money in reserve.
5. Therefore, the direct result is that banks will increase the amount of loans they make to customers, stimulating more lending activity.